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Brazilian assets were already facing a difficult start to 2021.
The second wave of Covid-19 that hit the world late last year is still peaking in the country of 213 million, with cases at an all time high. The cash payments, or coronavouchers, that supported much of the population during the pandemic expired last month. Politicians face the unenviable task of reducing them now or breaking a spending ceiling that keeps debt levels and a chronically weak currency within limits.
Today, President Jair Bolsonaro began his re-election campaign a year earlier. That’s what investors fear, anyway, since the so-called “Trump of the tropics” sacked the CEO of a state oil company.
Brazilian oil
(ticker: PBR) on February 19.
iShares MSCI Brazil
The exchange-traded fund (EWZ), which already jumped the emerging market rally earlier this year, has been down more than 7% since then.
Petrobras,
as the company is known, this is not that big of a deal per se – around 5% of the equity index. Brazilian observers fear this will create a pattern. The sin of the fallen boss has been to raise fuel prices based on crude oil, which has never been a popular development.
If Bolsonaro, who faces voters in October 2022, plays crowds during the ongoing budget debate, the consequences would be more serious. “Bolsonaro’s decision to replace the CEO of Petrobras disappoints the hopes of Brazil’s return to economic orthodoxy,” conclude analysts at BCA Research.
Optimism for Brazil hinged on the assumption that Bolsonaro would stick to his social issues of choice and leave economic policy to Finance Minister Paulo Guedes, who holds a doctorate from the University of Chicago. that the markets love. It worked in 2019: Guedes led a long-delayed pension overhaul through the country’s heavy Congress.
Hope has blossomed for more reforms this year as the two legislative chambers chose leaders friendly to Guedes in January. The lower house has passed a bill on central bank independence, a key liberal goal. But Bolsonaro, whose popularity rose with coronavoucher’s largesse last year, may no longer be on the sidelines.
“Bolsonaro 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 tempting valuations of the Latin American giant. “The markets were already lacking the will to trust sufficient fiscal reforms,” 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 Minister of Finance.”
A more optimistic view comes from Malcolm Dorson, Latin America portfolio manager at Mirae Asset Global Investments. Things can be tough in Brazil, but not enough to justify a 30% drop over the past year in the shares of its two largest private banks,
Itau Banco Holding
(ITUB) and
Bradesco Bank
(BBD).
“NPLs are lower than expected, so you should see profits rise quickly,” he predicts. Dorson also expects good macro news, as Congress passes a reasonable spending plan next month and the underrated public health department steps up Covid vaccinations.
De Aragao is forecasting a mix of positive and negative headlines in Brazil this year. Congress could still surprise on the upside with a tax reform bill, but will struggle to thread the budget 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 excite the markets.
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