Political risks begin to crystallise

The past month has seen political risks in key economies start to crystallise. The rout in Argentine markets, triggered by concerns about the dwindling re-election prospects of President Macri, has grabbed the headlines. But political risks are building in Brazil too. The government’s flagship pension reform cleared its first legislative hurdle but this was only after a significant delay, hinting at the opposition the bill could face in the next rounds of voting. Further delays to the timetable are likely and this will keep the real under pressure. In the near term at least, the key thing to watch will be the extent to which financial conditions tighten. So far, while these remain relatively loose in Brazil, they have tightened sharply in Argentina. This will keep the latter’s economy weak ahead of October’s critical election.