Why investors in Brazil are ready to give Bolsonaro another go
Ebullience has begun to return, fuelled by resurgent stocks and optimism on reforms
BRYAN HARRIS
For some in Brazil, the past year and a half is best forgotten. Or if not scrubbed completely, then at least viewed as a dry run.
Those 18 months were a rough ride for anyone with even a passing interest in the resurgence of this one-time darling of emerging markets, the “B” in the Brics.
Despite much fanfare from the business community following the election of rightwing President Jair Bolsonaro, economic growth struggled to top 1 per cent in his first year in office. Its currency, the real, then weakened about 30 per cent amid a broader sell-off across Latin America.
Moreover, the administration’s economic reform agenda was — with the exception of a constitutional amendment on pensions — sacrificed by the president. He calculated he could reap greater political reward by riling his base into a crusade against Congress, than by focusing on the nitty-gritty.
And this was before coronavirus struck, tearing holes in Brazil’s public finances and forcing millions into unemployment.
All that, however, is beginning to feel like a false start for some in the country’s business community. The ebullience that dominated the early days of the Bolsonaro administration has begun to return, fuelled by a resurgent stock market, fresh optimism on reforms and improving economic data.
“Gradually we are leaving the worst behind. There is a north: economic freedom. The reform agenda takes us to that north,” said Adolfo Sachsida, an economic policymaker and cheerleader for the administration’s liberal reform efforts.
Mr Sachsida is not alone. In a marked departure from the ambivalence that characterised Congress last year, senior power brokers in Brasília have thrown their weight behind reform plans. They are focused in particular on an overhaul of Brazil’s byzantine tax system that would streamline thousands of unwieldy rules into neat packages.
Rodrigo Maia, the powerful speaker of the lower house, has made clear he wants to get the reform done before his term expires early next year. And coming along for the ride is the Centrão, a notoriously fickle political bloc of 221 of the house’s 513 lawmakers, which has recently allied with Mr Bolsonaro.
Investors are animated too. The country’s benchmark Bovespa index this month passed the 100,000 point threshold, up more than 60 per cent since a March trough — and has so far stayed above that symbolic level.
The surge is being fuelled by domestic and international considerations. At home, interest rates have been slashed to historic lows, with the benchmark Selic rate now at 2.25 per cent. This has fuelled a rush into equities, with the number of investors on the São Paulo stock exchange tripling over the past two years.
Foreigners, encouraged by a vast asset-purchasing programme from the US Federal Reserve, have begun slowly returning to Brazil after an exodus at the start of the pandemic. Debt purchases by overseas investors turned positive in May, according to the Institute of International Finance, and equities are expected to follow suit when data for June is released early next month.
“The foreigners will come back because asset prices in the US are stretched. You don’t get as many bargains in the US,” said Marcos Casarin, head of LatAm macro research at Oxford Economics.
“On the other side, hedging the cost of the real is very cheap these days,” he added, pointing out that investors were buying dollars in the futures market to protect themselves from currency risk.
Meanwhile, the real appears to have stabilised around 5.3 to the dollar — a far cry from 4 at the beginning of the Bolsonaro administration but a recovery from above 5.8 in May.
Finally, optimism has been bolstered by expectations that economic growth may not be quite as dire as forecast during the early days of the pandemic. While international organisations have painted a bleak picture, researchers closer to home are revising estimates upwards. The finance ministry said a positive move in metrics such as equipment production and electricity consumption informed its latest forecast of a 4.7 per cent contraction for 2020, much brighter than the IMF’s forecast of a 9 per cent reduction.
Not everyone is buying this back-to-the-future story. Some analysts point to major obstacles ahead including the risks of mass bankruptcies and unemployment. The actual unemployment rate in Brazil is believed by some to be five percentage points higher than the official 13 per cent rate.
And then there are the looming fiscal challenges, with the county’s ratio of debt to economic output expected to hit 95 per cent this year as a result of crisis-fighting programmes.
“Capital markets are booming?.?.?. but it is not reflecting the real economy,” said Andre Perfeito, chief economist at brokerage Necton.
“Nobody wants to talk about the fiscal side. Nobody really wants to talk about that.”
bryan.harris@ft.com |
