On February 19th, Brazilian President Jair Bolsonaro replaced the head of Brazil’s state-run oil company Petrobras after disputes over fuel price hikes. The former head of Petrobras, Roberto Castello Branco, had insisted on the need for increasing the price of diesel fuels following the weakening of the Brazilian real and the recovery in global oil prices. He was replaced by former Defence Minister Joaquim Silva e Luna, a retired army general with no experience in the sector, as the new CEO of the company. The move triggered a sell-off in the Petrobras share price, which declined by 20% in the days following the announcement, see Figure 1.
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Sentiment turns negative in Brazil as politics take centre stage
The campaign for the 2022 Presidential election in Brazil has unofficially started. In recent weeks, sentiment has turned against Brazilian President Jair Bolsonaro following a series of events and decisions made by the divisive South American leader. Markets have reacted negatively to the increased uncertainty which could threaten the future of his reform agenda. Lack of control of the Covid-19 pandemic could also delay the economic recovery in 2021. In this Macro Flash Note, Joaquin Thul discusses the outlook for Brazil.
Figure 1. Petrobras stock price decline after CEO change
Source: Refinitiv and EFGAM.
The removal of Castello Branco has raised concerns over the President’s increased intervention in the Brazilian economy and reduced investor optimism following the government’s initial reforms success. Finance Minister Paulo Guedes, a close ally of Castello Branco, has been a strong advocate of reducing state intervention in the economy, favouring privatisation of some of Brazil’s largest companies. Although he successfully delivered on pension reform, plans for tax and administrative reforms have been delayed in Congress.
In addition, on March 8th a Brazilian Supreme Court judge annulled the criminal conviction of former President Lula Da Silva, who was convicted in 2017 on corruption charges related to the Lava Jato investigation and in 2019 received a 12-year jail sentence. If confirmed, the ruling, which still needs the approval of the full Supreme Court, would restore Lula’s political rights and allow him to run as candidate for the PT party in next year’s Presidential election. In the previous week, a poll showed that from a list of ten possible presidential candidates, only Lula Da Silva had a higher percentage of vote intentions than President Bolsonaro.1
Markets in Brazil tumbled following this news driven by two main factors. Firstly, investors’ fears mounted over a potential victory for left-wing Lula Da Silva in the October 2022 elections. More importantly, the recent weakening of Jair Bolsonaro and the loss of popularity over his handling of the Covid-19 pandemic and the Petrobras leadership might turn the current President towards more populist policies as the election campaign has unofficially started.
Figure 2. Brazilian real exchange rate and PPP
Source: Refinitiv and EFGAM.
As a result, the Bovespa equity index fell by over 4% on Monday, adding to a 7% decline year-to-date. The Brazilian real weakened to BRL 5.87 against the US dollar, the weakest level since May 2020, registering a depreciation of 12.7% so far in 2021, see Figure 2.
Brazil’s GDP fell by 4.1% in 2020, better than other countries in the region. This was attributed to the large amount of fiscal support from the government, representing 14.5% of GDP, and loose monetary policy. However, emergency cash transfers will finish in Q1-2021 and further stimulus will need the approval of both houses in Congress. Inflation, currently at 4.56% year-over-year, has become a concern. Large increases in the producer price index, which is a leading indicator of consumer prices, suggest risks ahead, see Figure 3. Minutes from the last monetary policy meeting in January highlighted that commodity price shocks and their effects on food and fuel prices had become more persistent than expected. As a result, markets currently expect a 25bps interest rate hike following the next meeting on March 17th.
Figure 3. Brazil CPI and PPI (%YoY)
Source: Refinitiv and EFGAM.
President Bolsonaro told Brazilians last week they should “stop whining” about the pandemic as he called for states to start easing restrictions to mobility.2 With over 60,000 daily new Covid-19 cases and more than 1,500 deaths per day attributed to the virus, the country is struggling to contain the health crisis.
In conclusion, uncertainty has increased in Brazil following recent political news. This threatens to divert the government’s attention from the current economic and health crisis to the political campaign ahead of next year’s election. The need for further fiscal stimulus and the imminent tightening of monetary policy could threaten to delay the return to pre-pandemic growth levels in Latin America’s largest economy.
1 Ipec (Inteligencia em Pesquisa e Consultoria), March 2021
2 https://www.dw.com/en/coronavirus-digest-brazils-bolsonaro-tells-people-stop-whining/a-56778948