If Brazil’s President Dilma Rousseff had wanted to know the cost of suddenly losing her respected finance minister Joaquim Levy, she received the answer last Friday (16).

Rumours spread just as traders were going home for the weekend that Mr Levy was quitting. Between the start of the rumour and the government’s official denial one or two hours later, the real depreciated about 3 per cent against the dollar to R$3.92.

The episode highlighted the new investment reality in Brazil – that Latin America’s largest capital market has become driven by political risk. Before the latest rumours concerning Mr Levy, the market was being buffeted by speculation over whether Ms Rousseff of the left-leaning Workers’ Party, known as PT, would be impeached.

The volatility recalls trading during the presidential election last year when every poll indicating a victory for Ms Rousseff, who markets see as an economic interventionist, sent shares lower and the currency weaker against the dollar.

“On the domestic front, it is almost exclusively politics,” said Alejo Czerwonko, emerging markets strategist at UBS Wealth Management, listing the factors affecting the Brazilian market.

“And on the external front, it is a combination of the Fed and China,” he said, referring to speculation over when the US Federal Reserve would begin raising interest rates.

During the first 10 months of President Rousseff’s second term, the stability that characterised much of the previous decade of Brazilian politics has disappeared.

A deepening recession, with economists surveyed by the central bank predicting a 3 per cent contraction this year and a 1.22 per cent fall in 2016, is leading to rising unemployment.

This, combined with a corruption scandal at state-owned oil company Petrobras, has sent Ms Rousseff’s popularity in the polls to record lows.

She appointed Mr Levy, a University of Chicago-trained economist, to reverse the fiscal largesse of her first term. But her administration’s flip-flopping on budget targets in September earned Brazil a downgrade of its investment grade rating to junk by agency Standard & Poor’s.

Fitch last week downgraded its rating for Brazil to one notch above junk with a negative outlook, increasing the threat that two of the three main rating agencies will rank Brazil as subinvestment grade.

“Continued political and policy uncertainties have added to domestic economic woes,” Fitch said in its statement.

The agency pointed to how a rebellious congress has frustrated Ms Rousseff`s attempts to implement fiscal austerity while the opposition, emboldened by her political weakness, has begun moves to impeach her.

Ms Rousseff’s PT has responded by trying to impeach the impeachers. It is trying to oust the powerful house speaker, Eduardo Cunha, a sworn opponent of the president who has the power to kick off the impeachment process.

Markets are pricing in this political uncertainty, with the real reaching its weakest level on record last month against the dollar of R$4.2478, and spreads on credit default swaps and other risk-related instruments on the rise.

“Until 2013, Brazil was a bit of a golden child among the emerging markets,” said Glenn Levine, analyst with Moody`s Analytics, a research company. “But I would say there has been a confluence or a perfect storm of bad news and bad economic management.”

He said his company’s measure of sovereign default risk for Brazil over a one-year timeline had risen nearly five times in 2015 – thanks largely to a sharp increase in spreads on credit default swaps – while the five-year default risk had more than doubled.

Another research firm, Oxford Economics, ranked Brazil as 68th on a list of 164 countries measured by their political and economic risk, with a lower ranking signifying higher risk.

Brazil was less risky than India or Russia, Argentina or Venezuela, according to the ranking. But it was more risky than Paraguay, Bolivia, Colombia and Peru – and even China, which was ranked 110th.

Still, most analysts consider much of Brazil’s problem a homemade crisis of confidence. It could be painfully but reliably resolved by a government with the political will to cut expenses and restore the budget to a healthy primary fiscal surplus – the balance before interest payments.

Brazil still has a strong “shock absorption” capacity given its higher foreign currency reserves, Fitch said in its note. “The share of foreign currency debt in total general government debt remains low,” it said.

Mr Czerwonko said UBS Wealth Management had placed Brazilian equities on a neutral rating because prices-to-earnings ratios were at 12.2 times the last 12 months’ earnings – the historical average.

He said he expected the real to settle at closer to R$4.20. Better quality companies or those with export opportunities were becoming attractive at these levels.

“We like certain names very selectively,” he said.

In the coming months, the market is expected to continue to be volatile on rumours over Mr Levy’s future and Ms Rousseff’s impeachment, analysts said. But any impeachment rally might be shortlived given the lack of clear alternative candidates to replace her as president.

“Such a rally would probably be unsustainable,” said one analyst with a foreign firm.