BRAZIL (Reuters) – Brazil’s financial markets fell on Monday as investors gave up the country’s currency and shares as interest rates rose after President Jair Bolsonaro moved late on Friday to fire the head of the oil company Petrobras state after weeks of clashes over fuel price increases.
The intervention of the right-wing populist in one of the most valuable companies in Brazil, together with the promise to reduce prices in the energy sector as well, have expressed growing concern about the government’s commitment to free markets.
Several brokerages have downgraded Petroleo Brasileiro SA, as Petrobras is officially known, and Bank of America has reduced its Brazilian shares to “market share” in its Latin American portfolio, excluding Petrobras and the state-owned electricity company Eletrobras altogether.
“Today is a pretty bad day,” said a hedge fund trader in Sao Paulo. “The big concern now is whether Bolsonaro’s decisions will be limited to public companies or whether he will spend more without reforms.”
Petrobras’ preferred and ordinary shares fell about 20% a month, erasing more than 60 billion reais ($ 11 billion) from the company’s value. Its market capitalization fell by about 28 billion reais on Friday.
The Bovespa index fell by more than 5% in early trading, before splitting its losses, with preferred shares in Centrais Eletricas Brasileiras, as Eletrobras is officially known, falling by almost 8% at one time.
The real has fallen by up to 2.5%, to a 3-1 / 2-month low of 5.53 per dollar, bringing its losses against the dollar so far this year to 6% and come back easily.
The real is one of the weakest performances against the dollar so far this year, according to Refinitive data on 152 currencies.
In the long run, the interest rate also rose on Monday. The contract in January 2022 increased by almost 20 basis points, to 3.61%, a level not seen since May last year.
Brazil’s credit swaps (CDS), effectively the cost of insuring against defaulting, rose 22 basis points to 185 bps, the highest in three months.
Morgan Stanley removed its “similar” recommendation on Brazil’s sovereign bonds, citing tax concerns and potential side effects from Bolsonaro’s action.
Bolsonaro defended his decision to replace Petrobras chief executive Roberto Castello Branco with a retired army general with no experience in oil and gas, insisting on Monday that recent fuel price hikes have hurt the Brazilian people.
“It is my right to renew (his term) or not. It will not be renewed. What is the problem? Some people in the financial markets are very happy with a policy that only … serves the interests of certain groups in Brazil “, he told the supporters outside the presidential palace.
Over the weekend, Bolsonaro threw the rise in energy prices as an attack on himself and promised to reverse the trend.
He said on Monday that there was room to reduce fuel prices by 10% by reducing taxes and profits for fuel distributors.
A survey of institutional investors conducted by the online brokerage XP Investimentos launched over the weekend showed that 57% of investors now believe that the official spending limit of the government will be broken this year, up from 32% last month.
A growing number of investors also believe that Economy Minister Paulo Guedes, a dedicated free investor, will not run for office after June.
Reporting by Jamie McGeever; Additional reports by Paula Laier, Tatiana Bautzer and Luciano Costa in Sao Paulo, Lisandra Paraguassu in Brasilia, Marc Jones in London; Editing by Brad Haynes, Steve Orlofsky and Richard Chang