Brazil: From bad to worse

The news flow in Brazil continues to worsen. November inflation surprised to the upside, mainly because of food prices. On the political front, the impeachment process has slowed down, with the Supreme Court deciding to suspend impeachment proceedings until it makes a decision next Wednesday. 

Meanwhile, the speaker of the house (who is now driving impeachment proceedings) is also facing corruption allegations. Finally, Brazil's Congress recesses on December 22. If the recess is not suspended, the impeachment process will only restart in February. Until then, uncertainty will drag on, and there will be no appetite to push through new fiscal consolidation measures. 

Moody's has now put the Brazilian sovereign rating under review, implying that a downgrade below investment grade could occur in the next 90 days. The two main drivers seem to be the deterioration in fiscal metrics, and political lethargy - and neither looks likely to improve any time soon. The risks in Brazil continue to be on the downside.