THY PRESIDENT of Brazil, Jair Bolsonaro, would like to mention his Minister of Economics at the University of Chicago, Paulo Guedes, his “Posto Ipiranga”, A chain full of service filling stations. The nickname fascinated markets during the 2018 election campaign, but Guedes’ reform agenda lost ground due to populist movements aimed at winning re-election. When Mr. Bolsonaro fired Petrobras boss Roberto Castello Branco on Feb. 19 to upset truck drivers over rising fuel prices, markets saw this as a sign of more interference. The state-owned oil company’s share price fell 21%, wiping out 100 billion euros ($ 18 billion) from its market value. The benchmark stock index of Brazil fell by 5% and the rule lost 2.4% against the dollar(everyone has since recovered from the losses).
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What is unusual is not that Mr. Bolsonaro intervened, but how he did it. With the rise in oil prices, the real decline and an election approaching in 2022, ‘no government could resist the populist temptation’, says a former executive of Petrobras, who had 16 bosses in 30 years . But Mr. Bolsonaro has Mr. Castello Branco, a friend of Guedes, fired on Facebook without consulting Petrobras’ board. To supporters who gathered outside the presidential palace, he said. Castello Branco mocked for working from home during the pandemic, uttering a nationalist slogan: “Is we petroleum, or does it belong to a small group of investors?”
Mr. Bolsonaro endorsed the need for reforms to stabilize public debt, which is 100% of the price GDP, but the former army captain and congressman in the back seat never fully accepted a liberal agenda. Tax and public reforms got stuck.With rising inflation and the ever-shrinking pandemic of growth and employment, “the pendulum has swung in a more interventionist direction,” said Mário Mesquita of Itaú, a bank. The army general appointed to run Petrobras may not stop price controls, in part because of new rules protecting minority shareholders, instituted following a corruption scandal and excessive intervention under Dilma Rousseff, a former president. But the company’s plans to sell unprofitable assets will suffer from greater uncertainty.
So does the Brazilian economy as a whole. Markets are becoming less tolerant of the heaviness of Mr. Bolsonaro, says Ana Carla Abrão of Oliver Wyman, a consultant. On February 25, Congress will begin voting on a constitutional amendment that would make it possible to bypass a spending ceiling (in order to fund a new round of emergency payments for poor workers) and to introduce measures to curb spending growth. (as by freezing salaries in the public sector). Both are necessary, but politicians may approve spending without the savings, delaying the reforms to an elusive future date. This will increase the chances that the central bank will raise interest rates next month for the first time since 2015.
Guedes’ silence amid the turmoil suggests he remains hopeful that Congress, which recently elected Bolsonaro’s allies as heads of its two chambers, will adopt fiscal measures and slimmer versions of tax and public reforms. He can count on ambitious reforms the re-election of mr. Bolsonaro can follow. That thinking seems desirable. Still, says Chris Garman of Eurasia Group, another advisory firm, just like Mr. Bolsonaro the cost of dismissing Mr. Castello Branco underestimated. Those who think that Guedes will next time underestimate the strength of their relationship. ‘We Posto Ipiranga is irreplaceable, ”Bolsonaro said in November. The problem is that the lights are out, the service has been suspended and the Brazilian economy is splashing. ■
This article appears in the Finance and Economics section of the print edition under the heading “Petrol Problems”