Brazilian Real Gains On Bolsaro Win, Huge Challenges Ahead

Brazilian Real, Jair Bolsonaro Talking Points:

Markets have taken the election of Jair Bolsonaro to Brazil’s Presidency quite calmly
They had some time to get used to the idea, and seem to have largely priced it in
However, the new President faces challenges that have defied much more experienced players

Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are out now.

The Brazilian Real has strengthened modestly to new five-month lows against the US Dollar on the widely expected victory of far-right candidate Jair Bolsonaro in the country’s turbulent presidential election on Sunday.

Brazil joins the growing list of countries in which perceived anti-establishment candidates have done well, with Bolsonaro’s win due in no small part to the corruption scandals plaguing previous administrations, notably the preceding two.

Markets Seem Sanguine At The Election Result

The Real’s immediate reaction suggests that markets have at least made their peace with the advent of Bolsonaro, despite his being a self-confessed economic neophyte.

USD/BRL has retraced about half of the gains put in since March, which took it up to three-year peaks in late August as the prospect of higher US interest rates took a heavy toll on Emerging Market currencies in general.

Still, while the new administration in Brasilia can probably take heart from this, huge challenges lie ahead. Those higher US rates remain a reality, which will to weigh on economies like Brazil for some time to come. Indeed much of the International Monetary Fund’s recent global growth downgrade was predicated on its fear of stronger headwinds for just such Emerging Markets.

Urgent Problems Loom Large

The prospect of trade war has not gone away either. For the moment, it seems that US agricultural sanctions against China have provided a boom for Brazilian farmers, who can be alternative suppliers, but local ministers have warned that rising costs may yet hamper competiveness.

Brazil is also in urgent need of economic and fiscal reform, notably in the area of productivity where Gross Domestic Product per worker has stagnated since the 1990s. The Fitch credit rating agency fretted Brazil’s large fiscal deficit, rising debt burden and vast mandatory spending commitments in a report earlier this month. The public pension fund also needs attention quickly.

Now these are all long-standing and crippling domestic problems. Successive administrations have either failed to solve them or not even tried. They now fall to Bolsonaro. It seems that the markets are prepared for the moment to give him the benefit of many doubts, but that happy state is not likely to last.

The economic neophyte needs to get up to speed very quickly.

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— Written by David Cottle, DailyFX Research

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Published at Mon, 29 Oct 2018 02:00:00 +0000

April 10, 2017

Rent Control Makes for Good Politics and Bad Economics

mises.org / Gary Galles / April 10, 2017

One needn’t read very much about public policy before coming across some statement to the effect that “bad economics makes good politics.” This statement is clearly untrue when good politics is defined as furthering mutually beneficial arrangements, as good economics is central to that task. But the statement is often true when good politics is defined as attracting 50%-plus-one votes on some issue or candidate, which is a much different standard, leaving plenty of room for government-imposed harms to be imposed on citizens.

Few issues reflect this divergence between “good” politics and bad economics more clearly than rent control. One of the most universally accepted propositions among economists is that rent control produces a host of adverse social consequences with its large involuntary redistribution of wealth and suppression of market prices as communicators of information and incentives. Despite that, it has been adopted as policy in many places and times — and now is a good time to revisit these issues, as efforts are currently underway in several states (including California, Oregon, Washington, and Illinois) to repeal existing statewide restrictions on rent control.

How Rent Control Destroys Value

Rent control takes a large portion of the value of residential properties from landlords. It does so by removing owners’ rights to accept offers willingly made by potential renters. And the value of the rights involved are large. For example, after Toronto imposed rent control in 1975, affected building values fell by 40% over five years, and a decade ago, such losses were estimated at $120 million annually in Santa Monica. A law like rent control, which can take half or more of each apartment’s value from the landlord, harms them just as much taking away half of their apartments, even though the latter is recognized as theft. Those stripped property values are given to current tenants, whose resulting bonanzas are shown by the fact that those under strict rent control almost never leave.