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TPRESIDENT from Brazil, Jair Bolsonaro, likes to call his University of Chicago-trained economy minister Paulo Guedes his “Ipiranga gas station», A chain of full-service gas stations. The moniker charmed the markets during the 2018 election campaign, but Mr Guedes’ reform agenda lost ground in the face of populist measures to win re-election. When Mr Bolsonaro fired Petrobras boss Roberto Castello Branco on February 19 to appease truck drivers upset over rising fuel prices, markets saw it as a sign of interference ahead. The stock price of the state-owned oil company fell 21%, wiping 100 billion reais ($ 18 billion) from its market value. Brazil’s benchmark stock index fell 5% and the real lost 2.4% against the dollar(all have since recovered part of the losses).
What is unusual is not that Mr Bolsonaro intervened, but how he did it. With the rise in the price of oil, the real fall and the approach of elections in 2022, “no government could resist the populist temptation,” said a former Petrobras executive, who has had 16 bosses in 30 years. But Mr Bolsonaro sacked Mr Castello Branco, a friend of Mr Guedes, on Facebook, without consulting the Petrobras board. To fans gathered outside the presidential palace, he mocked Mr. Castello Branco for working from home during the pandemic and echoed a nationalist slogan: “Is the oil ours or does it belong to a little one?” group of investors? “
Mr Bolsonaro has made lip service to the need for reforms to stabilize public debt, which is approaching 100% of GDP, but the former army captain and backbench congressman never fully embraced a liberal agenda. Tax and public sector reforms have stalled.Today, with rising inflation and the pandemic continuing to hurt growth and jobs, “the pendulum has shifted in a more interventionist direction,” says Mário Mesquita d’Itaú, a bank. Army general asked to lead Petrobras could stop before price controls, in part because of new rules that protect minority shareholders, introduced after 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.
The same will be true for the Brazilian economy as a whole. Markets are increasingly less tolerant of Mr. Bolsonaro’s brutality, says Ana Carla Abrão of Oliver Wyman, a consultancy firm. On February 25, Congress will begin voting on a constitutional amendment that would allow it both to bypass a spending cap (to fund a new round of emergency payments for the working poor) and to enact measures to curb the growth in spending (eg freeze on public sector wages). Both are needed, but politicians can approve spending without the savings, delaying reforms to an elusive future date. This would increase the already high chances that the central bank will hike interest rates next month for the first time since 2015.
Mr Guedes’ silence amid the turmoil suggests he hopes Congress, which recently elected Mr Bolsonaro’s allies to head both chambers, will pass the tax measures and lean versions of the tax reforms and the public sector. He may think that ambitious reforms can follow Mr Bolsonaro’s re-election. This thought seems futile. Yet, says Chris Garman of Eurasia Group, another consulting firm, just as Mr. Bolsonaro underestimated the cost of firing Mr. Castello Branco, those who think Mr. Guedes will be next underestimate the strength. of their relationship. “Our Ipiranga gas station is irreplaceable, ”Bolsonaro said in November. The problem is, the lights are out, service has been suspended, and the Brazilian economy is going down. ■
This article appeared in the Finance & Economics section of the print edition under the title “Oil Problems”
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