Petroleum Brazilian (Petrobras) gas station worker in Rio de Janeiro, Brazil. Petrobras refused after President Jair Bolsonaro expelled 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 that hit the world at the end of last year still peaks at 213 million inhabitants, with a record number of cases. Cash payments, or coronavouchers, which supported much of the population during the pandemic, expired last month. Politicians face the unenviable task of cutting them now or crushing a spending ceiling that keeps debt levels and a chronically weak currency within limits.
Now, President Jair Bolsonaro began his re-election campaign a year earlier. That’s what investors fear, anyway, since the self-proclaimed “Trump of the Tropics” fired the CEO of the state-owned oil company
Brazilian Oil
(ticker: PBR) on February 19.
iShares MSCI Brasil
The Exchange-Traded Fund (EWZ), which already skipped the recovery in emerging markets earlier this year, has fallen more than 7% since then.
Petrobras,
as the company is known, it is not a big deal in itself – about 5% of the stock index. Observers in Brazil fear that this will set a pattern. The deposed chief’s sin was to raise fuel prices in line with crude oil, which has never been a popular fact.
If Bolsonaro, who faces voters in October 2022, plays for the crowd during the pending fiscal debate, the consequences would be more serious. “Bolsonaro’s decision to replace the CEO of Petrobras destroys hopes for a return of Brazil to economic orthodoxy,” conclude analysts at BCA Research.
Optimism about Brazil depended on the assumption that Bolsonaro would limit himself to his favorite social issues and leave economic policy to Finance Minister Paulo Guedes, a Ph.D. whom markets love. This worked in 2019: Guedes conducted a long-delayed pension reform in the country’s heavy Congress.
Hope blossomed for further reforms this year, when both legislative chambers chose friendly leaders from Guedes in January. The Chamber of Deputies passed a bill on central bank independence, a fundamental liberal objective. But Bolsonaro, whose popularity grew with the coronavoucher’s generosity last year, may not be left out of the picture again.
“Bolsonaro discovered the wonder of paying social assistance,” says Thiago de Aragão, who accompanies Brazil at the Center for Strategic and International Studies.
This is making investors cautious, despite some tempting assessments on the Latin American giant. “The markets were no longer willing to rely on sufficient fiscal reforms,” said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “Now we see that Bolsonaro is not working side by side with the finance minister.”
A more optimistic view comes from Malcolm Dorson, portfolio manager for Latin America at Mirae Asset Global Investments. Things may be difficult in Brazil, but not enough to justify a 30% drop from last year in the shares of its two largest private banks,
Itau Banco Holding
(ITUB) and
Bradesco Bank
(BBD).
“Delinquent loans are less than expected, so you should see profits skyrocket,” he predicts. Dorson also expects good macro news, as Congress approved a reasonable spending package next month and the underrated public health service has increased Covid’s vaccines.
De Aragão anticipates a mix of positive and negative headlines in Brazil this year. Congress may still positively surprise with a tax reform bill, but it will find it difficult to insert the fiscal needle as the pandemic continues, he predicts.
“It is rare in Brazil for something terrible or terrible to happen,” he says.
This confusion will not be enough to enliven the markets.