A worker at a Petroleo Brasileiro (Petrobras) gas station in Rio de Janeiro, Brazil. Petrobras refused after President Jair Bolsonaro fired the CEO.
Andre Coelho / Bloomberg
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Brazilian assets are already facing a rough start to 2021.
The second wave of Covid-19, which hit the world late last year, is still rising in the nation by 213 million, with cases at a record high. Cash payments or coronavouchers that supported a large part of the population through the pandemic expired last month. Politicians face the unenviable task of cutting them now or breaking a spending ceiling that maintains debt levels and a chronically weak currency.
Now, President Jair Bolsonaro began his re-election campaign a year earlier. In any case, investors are afraid of this, since 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 exchange traded fund (EWZ), which has already missed the emerging markets rally since the beginning of the year, has fallen by more than 7% since then.
Petrobras,
as the company is known, it is not such a big business in itself – about 5% of the stock index. Observers in Brazil are worried that it will establish a model. The sin of the deposed boss was the increase in fuel prices according to crude oil, never a popular evolution.
If Bolsonaro, who faces voters in October 2022, plays for the crowd during the pending tax debate, the consequences would be more severe. “Bolsonaro’s decision to replace CEO Petrobras shatters hopes of Brazil’s return to economic orthodoxy,” BCA Research analysts conclude.
Optimism about Brazil depended on the assumption that Bolsonaro would respect the social problems of his pet and leave economic policy to Finance Minister Paulo Guedes, a doctor at the University of Chicago whom the markets adore. This worked in 2019: Guedes led a long-delayed pension review through the country’s difficult Congress.
Hope has blossomed for several reforms this year, as both houses of parliament elected Guedes-friendly leaders in January. The lower house passed a bill on central bank independence, a key liberal goal. But Bolsonaro, whose popularity grew with the size of the coronavoucher last year, may not stay on the sidelines again.
“Bolsonaro has discovered the wonder of social support payments,” says Thiago de Aragao, who is pursuing Brazil at the Center for Strategic and International Studies.
This makes investors cautious, despite tempting ratings on the Latin American giant. “The markets have already lacked the desire to trust enough tax reforms,” said Aaron Hurd, senior foreign exchange 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, Latin America portfolio manager at Mirae Asset Global Investments. Things may be difficult in Brazil, but not enough to justify a 30% drop in the last year in the shares of the two major private banks,
Itau Banco Holding
(ITUB) and
Bradesco Bank
(BBD).
“Non-performing loans are lower than expected, so you should see the gains coming quickly,” he predicts. Dorson also expects some good macro news as Congress passes a reasonable spending package next month, and the undervalued public health service increases vaccinations against Covid.
De Aragao anticipates a mix of positive and negative Brazilian titles this year. Congress may continue to surprise with a tax reform bill, but will fight to put the tax needle as the pandemic continues, he predicts.
“It’s rare in Brazil for something terrible or terrible to happen,” he says.
This confusion will not be enough to encourage markets.