Brazil less attractive to investors after protests

By Tiffany Smith

Budrigannews.com – For investors in the largest economy in Latin America, the throngs of Jair Bolsonaro supporters who stormed the capital city’s highest government buildings served as a wake-up call.

Since the end of the military regime in 1985, elections have been followed by peaceful transitions of power. However, Brazil’s political polarization is growing, making it difficult for newly elected president Luiz Inacio Lula Da Silva after his narrow victory in the October vote.

T. Rowe Price portfolio manager Samy Muaddi referred to the Sunday events in Brasilia, when supporters of Bolsonaro invaded and vandalized the Congress, presidential palace, and Supreme Court buildings, as “disconcerting for investors.”

Muaddi stated, “Likely this is a temporary shock and the economic policy path under Lula and broader global financial conditions will determine investment outcomes.”

Investors and analysts said that the long-term evaluation of the new government will continue to focus on fiscal issues, despite Lula’s difficulties controlling the risks of this institutional shock.

According to Katrina Butt, a senior Latin America economist at AllianceBernstein (NYSE:), “Lula will work to unify a working coalition in Congress to pass legislation but will be careful not to impair his popularity with unpopular fiscal measures, potentially delaying the timeline for announcing fiscal adjustment measures.” LP in New York, as Reuters reported.

She stated, “but this is also connected to the new fiscal framework,” that lower inflation could enable the central bank to begin cutting interest rates in the second half of the year, further bolstering the economy. The market may reaffirm concerns about fiscal dominance and prevent the BCB from easing if the new parameters are seen as weak.

After policymakers highlighted inflationary risks arising from the leftist President-elect’s 168 billion reais ($32 billion) spending proposal to meet campaign promises, discussions of the new fiscal framework are crucial under Lula’s administration.

Elizabeth Johnson, managing director of Brazil research at TS Lombard, wrote in a note that the violence over the weekend “could reduce pressure on Lula to present an economic plan in coming weeks and could also slow the reform agenda.” “Because of the swift government response, the market impact has been limited.”

It appears that the short-term impact on markets is limited. The real dropped as much as 1.6%, but it made up the majority of its losses. Stocks turned positive after a brief downturn, and credit default swaps stayed mostly the same.

Although its commodity-exposed economy and steady stewardship by central bank governor Roberto Campos Neto helped it become an investor darling for emerging market asset managers last year, Brazil is no stranger to political turmoil.

According to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. (NYSE:), creditors will keep an eye on the political and social dynamics in the coming weeks.

Ramos told Reuters, “The violent demonstrations attest to the deep social and political polarization before and after the election.” Risk premia are high and could undermine overall governability due to the unsettling and deeply divided political environment and the high social tension that results from it.”

On Monday, the spread between Brazil’s hard currency debt and safe-haven U.S. Treasuries widened to 262 basis points, moving further away from the regular levels it touched at the beginning of December prior to the pandemic. From the close to 390 bps high in 2022, it continues to fall.

The main takeaway from the protests that took place on Sunday for the political risk advisory Eurasia Group is that there is a unified opposition that has the “potential to turn violent.” According to a report authored by Christopher Garman, Eurasia’s managing director for the Americas, social tensions could rise if Lula’s government loses popular support in the face of greater economic difficulties.

On Monday, a camp of Bolsonaro supporters was demolished by Brazilian soldiers supported by police. After demonstrators damaged furniture and windows, destroyed artwork, and stolen guns and artifacts, Lula promised to bring those responsible for the violence to justice.

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Jared Lou, a portfolio manager at William Blair Investment Management, stated, “Slowing growth, tight monetary policy, stubbornly high unemployment, and a weak fiscal balance all serve to limit the range of policy options available to the administration in the coming quarters.”