Brazilian Financial Market Frustrated by Bolsonaro, But Maintains Support

RIO DE JANEIRO, BRAZIL – If it still had hopes of a robust reform agenda, fiscal austerity, and privatization between now and 2022, the financial market lost its hopes once and for all during the pandemic.

The last straw in a glass already filled with sorrow for the failure to keep economic policy pledges came two weeks ago when the government threatened to embark on shady fiscal maneuvering to finance the ‘Renda Cidadã‘ (Citizen Income), an income distribution program that is the current apple of President Jair Bolsonaro‘s eye.

Still, the market is reluctant to permanently step away from the government – either because the President’s popularity has grown amid the pandemic, or by assessing the lack of options on which to place its chips in the 2022 elections.

“No one, in good conscience, will pick a fight with a President with 40 percent popularity,” said a director of a major Brazilian bank to Estadão newspaper. The report talked to a dozen executives from retail banks, investment banks, and funds, and the assessment is that important items on the economic agenda should take longer to progress than had originally been pledged.

However, both because of the President’s strong position and because of the uncertainty of other names with electoral chances to advocate a liberal ideology, the current market strategy is to wait and see.

Breaking through the spending ceiling – a constitutional amendment instituted in 2016 by the Michel Temer administration that limits spending growth to increasing inflation – can be dangerous: by threatening to do so, through the release of judicial escrow funds, the federal government has been the target of a hail of criticism.

Should it decide to toss fiscal austerity aside, banks, financial institutions, and investment funds would not only raise the volume of criticism. They will charge even more to repay Brazil’s public debt – thereby hanging the government. The lack of confidence should lead to higher interest rates, inflation, and further deepening of the recession, according to market assessment.

Therefore, according to market executives, the Bolsonaro government is in a “chicken or egg” type dilemma. He understood, thanks to the emergency aid, that distributing money to the population makes him popular. With an eye on this political capital, the President intends to create the ‘Renda Cidadã’, a lower but permanent incentive program. The threat to pierce the spending ceiling may sound bad to investors, but spending more has helped in popularity.

Agenda

Another topic of discussion in the market is Minister of Economy Paulo Guedes’ difficulty in delivering the promised reform and competitiveness agenda.

According to the Chief Economist of Garde, Daniel Weeks, the Minister has failed to convince Bolsonaro that it is “necessary to cut to make adjustments”. In the fight with the government’s political coordinators – such as Federal Deputy Ricardo Barros – Guedes seems to be at a disadvantage. “What we see today is that politics is holding the cards. If everything proceeds as it is, the stock market and the dollar will remain under pressure, says Weeks.

For Luiz Fernando Figueiredo, partner of Mauá Capital, whatever solution is found for Renda Cidadã, it will be difficult for the government to clear the financial market’s doubts about its commitment to control spending.

“And this doubt keeps the public debt rising. The fact is that the country has become impoverished. And it is not possible for the public sector not to contribute its share (in the sacrifices),” says Figueiredo. “Either we take care of it (public accounts) or Brazil will fall into the abyss,” he adds.

Guedes

The eventual departure of Minister of the Economy Paulo Guedes is no longer a taboo subject among financial market decision-makers. Quite the opposite: it may be a solution. “If Guedes is leaving and the government says: I’m bringing two names – one for the Ministry and another for political coordination – that the market will perceive him as capable of pushing administrative and tax reforms, in addition to privatizations, everyone will love it,” said an investment fund manager.

The Minister’s permanence is currently viewed as a “lifeline” only for the spending ceiling – which is the very least for the country to continue to be able to consider economic rebound in 2021 and 2022. However, it has become clear that he will not be able to push a bolder agenda. Thus, economists and bank managers consider that support for Guedes to stay has been declining in recent months.

Source: O Estado de S. Paulo