A worker at a Petroleo Brasileiro (Petrobras) gas station in Rio de Janeiro, Brazil. Petrobras declined after President Jair Bolsonaro fired the CEO.
Andre Coelho / Bloomberg
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Brazilian assets were already facing a difficult start to 2021.
The second wave of Covid-19, which arrived worldwide late last year, is still growing by 213 million, with maximum cases. Cash payments or coronavouchers, which supported much of the population through the pandemic, expired last month. Politicians face the unenviable task of lowering them now or breaking an spending ceiling that keeps debt levels and a chronically weak currency within limits.
Now President Jair Bolsonaro has begun his re-election campaign a year earlier. This is what investors fear, however, as the self-proclaimed “Trump of the tropics” fired the CEO of the state oil company
Brazilian oil
(ticker: PBR) on February 19th
iShares MSCI Brazil
the publicly traded fund (EWZ), which already skipped the rally in emerging markets earlier this year, has fallen more than 7% since then.
Petrobras,
as the company is known, it’s not such a big thing in itself: about 5% of the equity index. Observers in Brazil are worried that it will set a pattern. The sin of the deposed boss was to raise fuel prices in line with crude, never a popular fact.
If Bolsonaro, who faces voters in October 2022, plays to the crowd during the pending tax debate, the consequences would be more serious. “Bolsonaro’s decision to replace Petrobras’ CEO is lowering hopes of Brazil’s return to economic orthodoxy,” BCA Research analysts conclude.
Optimism about Brazil is based on the assumption that Bolsonaro would adhere to the social problems of his pets and leave economic policy to Finance Minister Paulo Guedes, a doctor of the University of Chicago. whom the markets adore. This worked in 2019: Guedes led a long-delayed pension review through the country’s heavy Congress.
Hope blossomed for more reforms this year, as both houses of parliament elected friendly Guedes leaders in January. The lower house passed a bill on central bank independence, a key liberal goal. But Bolsonaro, whose popularity increased with the generosity of the coronavou last year, may not stay on the sidelines again.
“Bolsonaro has discovered the wonder of social support payments,” says Thiago de Aragao, who follows Brazil at the Center for Strategic and International Studies.
This makes investors cautious despite some tempting valuations in the Latin American giant. “Markets already lacked the will to rely on enough tax reforms,” says Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “Now we see that Bolsonaro is not working hand in hand with the finance minister.”
A more optimistic view comes from Malcolm Dorson, portfolio manager in Latin America at Mirae Asset Global Investments. Things may be tough in Brazil, but not enough to justify a 30% drop over the last year in the shares of its two major private banks,
Itau Banco Holding
(ITUB) i
Bradesco Bank
(BBD).
“Unprofitable loans are lower than expected, so you should see profits increase rapidly,” he predicts. Dorson is also expecting some good macro news as Congress approves a reasonable spending package next month and the understated public health service increases vaccines against Covid.
De Aragao predicts a mix of positive and negative headlines from Brazil this year. Congress could still surprise the upside with a tax reform bill, but it will fight to thread the fiscal needle as the pandemic drags on, he predicts.
“It’s rare in Brazil for something terrible or fantastic to happen,” he says.
This confusion will not be enough to excite the markets.