An employee at a Petroleo Brasileiro (Petrobras) gas station in Rio de Janeiro, Brazil. Petrobras declined after President Jair Bolsonaro dismissed 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 worldwide late last year still hits the country of 213 million, with cases at record high. The cash payments, or corona vouchers, that supported much of the population during the pandemic ended last month. Politicians now face the unenviable task of lowering them or breaking a spending ceiling that curbs debt and a chronically weak currency.
Now President Jair Bolsonaro has started his re-election campaign a year earlier. That’s what investors fear, at least, as the self-proclaimed ‘Trump of the Tropics’ fired the CEO of state oil company.
Brazilian oil
(ticker: PBR) on February 19
iShares MSCI Brazil
Exchange Traded Fund (EWZ), which already skipped the emerging markets rally at the start of the year, has since fallen more than 7%.
Petrobras
as the company is known is not that big of a deal in itself – about 5% of the stock index. Viewers in Brazil worry it will form a pattern. The sin of the deposed boss was to raise fuel prices in line with crude oil, never a popular development.
If Bolsonaro, who faces voters in October 2022, plays to the public in the upcoming tax debate, the consequences would be more serious. “Bolsonaro’s decision to replace Petrobras’ CEO is shattering hopes for Brazil’s return to economic orthodoxy,” BCA Research analysts conclude.
Optimism about Brazil is based on the assumption that Bolsonaro would adhere to his favorite social issues and leave economic policies to Treasury Secretary Paulo Guedes, a Ph.D. from the University of Chicago. who worship markets. That worked in 2019: Guedes sent a long-delayed pension overhaul through the country’s cumbersome congress.
Hopes bloomed for more reforms this year when both legislative chambers elected Guedes-friendly leaders in January. The lower house passed a bill on central bank independence, an important liberal goal. But Bolsonaro, whose popularity skyrocketed last year with the corona voucher generosity, may not stay on the sidelines again.
“Bolsonaro has discovered the miracle of social aid payments,” said Thiago de Aragao, who follows Brazil at the Center for Strategic and International Studies.
That makes investors cautious, despite some tempting valuations at the Latin American giant. “Markets were already unwilling to rely on adequate tax reform,” said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “Now we see that Bolsonaro is not working hand in hand with the Treasury Secretary.”
A more optimistic view comes from Malcolm Dorson, portfolio manager Latin America at Mirae Asset Global Investments. It may be tough in Brazil, but not hard enough to justify a 30% drop in the shares of the two largest private banks over the past year,
Itau Banco Holding
(ITUB) and
Bradesco Bank
(BBD).
“Non-performing loans are lower than expected, so revenues should increase rapidly,” he predicts. Dorson also expects good macro news as Congress approves a reasonable spending package next month and the underrated public health service ramps up Covid vaccinations.
The Aragao expects a mix of positive and negative headlines in Brazil this year. Congress could still surprise positively with a tax reform bill, but will struggle to pull the fiscal needle as the pandemic continues, he predicts.
“It’s rare in Brazil for something terrible or great to happen,” he says.
That confusion will not be enough to excite markets.