A worker at a Petroleo Brasileiro (Petrobras) filling station in Rio de Janeiro, Brazil. Petrobras did not want to after President Jair Bolsonaro ousted the CEO.
Andre Coelho / Bloomberg
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Brazilian assets have already had a difficult start to 2021.
The second Covid-19 wave to hit the world at the end of last year is still falling in the country of 213 million, with cases at a record high. The cash payments, or coronavouchers, which supported a large portion of the population through the pandemic, expired last month. Politicians face the unenviable task of cutting them now or smashing 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. This is what investors fear anyway, as the self-proclaimed “Trump of the Tropics” fired the CEO of the state-owned oil company.
Petroleo Brasileiro
(ticker: PBR) on February 19th. The
iShares MSCI Brazil
The exchange traded fund (EWZ), which had already skipped the rise in emerging markets in the early years, has since fallen more than 7%.
Petrobras,
as the company is known, this in itself is not such a big deal – about 5% of the stock index. Brazil viewers are worried that it will give a pattern. The sacked boss’s sin was to increase fuel prices in line with crude oil, which was never a popular development.
If Bolsonaro, who faces the electorate in October 2022, plays for the crowd during the pending fiscal debate, the consequences will be more serious. “Bolsonaro’s decision to replace Petrobras’ CEO undermines hopes of Brazil’s return to economic orthodoxy,” concluded analysts at BCA Research.
Optimism about Brazil depends on the assumption that Bolsonaro will stick to his social issues and leave the economic policy to the Minister of Finance, Paulo Guedes, a doctor at the University of Chicago. who worship markets. It worked in 2019: Guedes managed a long-delayed pension recovery through the country’s cumbersome Congress.
Hope has blossomed for further reform this year as both legislative chambers elected Guedes-friendly leaders in January. The House of Commons passed a bill on the independence of the central bank, an important liberal goal. But Bolsonaro, whose popularity rose last year with the coronavoucher greatness, 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 enticing valuations in the Latin American giant. “Markets are already not prepared enough to rely on adequate fiscal reforms,” said Aaron Hurd, senior foreign exchange portfolio manager at State Street Global Advisors. “Now we see Bolsonaro not working hand in hand with the finance minister.”
A more optimistic view comes from Malcolm Dorson, portfolio manager of Latin America at Mirae Asset Global Investments. Things may be tough in Brazil, but not tough enough to justify a 30% drop in the last two years’ shares in its two largest private banks.
Itau Banco Holding
(ITUB) and
Banco Bradesco
(BBD).
“Loans that do not perform are lower than expected, so you should see your earnings rise quickly,” he predicts. Dorson also expects good macro news, as Congress will pass a reasonable spending package next month and the underestimated public health service will increase Covid’s vaccination.
De Aragao expects a mix of positive and negative news in Brazil this year. Congress may still surprise in the foreground with a tax reform bill, but will struggle to thread the fiscal needle as the pandemic continues, he predicts.
“It’s rare in Brazil for something terrible or great to happen,” he says.
The confusion will not be enough to excite markets.