Brazil’s markets fall when Bolsonaro turns to interventionism

(Bloomberg) – Brazilian markets crashed on Monday after President Jair Bolsonaro removed the head of the state-controlled oil company, the latest sign that his government is reintroducing pro-political policies to boost its declining popularity.

Bolsonaro’s decision on Friday to replace the trained economist at Chicago at the helm of Petroleo Brasileiro SA after a dispute over fuel prices surprised even his inner political circle, according to two government officials familiar with the section.

The real fell 2.4% on Monday, breaking the key level of 5.5 per dollar, even after the central bank entered the market with an offer of currency swaps. Petrobras shares fell 19% when analysts from Credit Suisse Group AG to JPMorgan Chase & Co cut their recommendations for the share over the weekend. Brazil’s Ibovespa stock index fell 5.1%, with state-owned companies leading losses.

“It really is an indication that politics may be going in the wrong direction,” said Brendan McKenna, a currency strategist at Wells Fargo in New York.

There was no room to discuss the move, which shows that a president is increasingly impatient with the government’s inability to appease his political base, including truck drivers who have threatened a strike due to rising diesel costs, added the people and demanded anonymity because the discussion is not public.

The president on Saturday justified his decision by saying that the oil company’s current management has shown “no commitment to Brazil.” Without elaborating, he added that he is preparing to replace other parts of his administration that “may not work”, including in the country’s power sector. On Monday, he told supporters in front of the housing palace that he did not disturb the company but rather demanded “predictability and openness” from it.

Read more: Bolsonaro calls for more changes after General has gone to Petrobras

Trust met

The move threatens to undermine investor confidence in Latin America’s largest economy while its recovery falters in a second wave of Covid-19. Bolsonaro’s popularity falls to near record lows after a cash program was handed out in December, with an MDA survey published on Monday showing that his approval rating fell by 8 percentage points to 32.9% in the last four months. It has driven him to find ways to please his political base to the detriment of Economy Minister Paulo Guedes.

“It reminds us of other moments of government involvement in economic policy,” said Caio Megale, chief economist at XP Investimentos, recalling a 2013 decision by former President Dilma Rousseff to cut electricity prices. “The market wants to know if the president’s decision is a new guideline for economic policy.”

Economists surveyed by the monetary authority raised their 2021 inflation forecasts above the target and also raised their interest rate estimates at the turn of the year for the second week in a row. Meanwhile, they lowered their 2021 economic growth forecast for the third week in a row.

James Gulbrandsen, investment manager for Latin America at NCH Capital, which has approximately $ 3 billion in assets under management, said that the uncertainty means that Brazil risks being avoided by investors.

“If Bolsonaro disrupts electricity prices, it will probably be over for his ability to attract foreign capital,” he said.

Roberto Castello Branco, Petrobra’s current CEO, has won the praise of investors by reducing the company’s debt and advocating for its independence from the government. General Joaquim Silva e Luna, whose nomination must be approved by the state-controlled corporate board, has been responsible for the Itaipu hydropower dam for the past two years and served as defense minister in the previous administration.

Silent Guedes

Guedes has been silent since Bolsonaro’s announcement about Petrobras, because there is nothing he can say about the decision to make it look better, according to three government officials close to him. Still, he will try to minimize investors’ concerns about political intervention by speeding up the approval of austerity measures in Congress, the people said, asking for anonymity because the discussions are not public.

The Ministry of Finance refused to comment.

Guedes has spent the last few days negotiating with lawmakers to approve a constitutional amendment that would allow the government to provide another round of Covid support to poor Brazilians in exchange for cuts in public spending in the coming years. The bill will ensure financial credibility and predictability, and the talks are going well because there is an understanding that the country does not have time to waste, the people said.

Although he has lost several political battles recently, Guedes does not intend to leave an economic legacy he can be proud of, the people added.

(Updates examining Bolsonaro’s popularity in the seventh paragraph)

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