Brazil’s financial market is more concerned with pandemic and fiscal risk than with the cabinet reshuffling

RIO DE JANEIRO, BRAZIL – The real started the week in strong devaluation, reflecting the worsening of the pandemic, the instability in the Executive branch of the country and, mainly, the fear of not meeting the spending cap in 2021. Around midday Monday, March 29, the concern of investors over the approval of a not very feasible 2021 Budget led the dollar to hit R$5.80 and the Ibovespa index to stop at 114,100 points.

In an interview published yesterday in the Financial Times newspaper, António Guterres, UN Secretary-General, warned about the risk of default in developing countries. Citing Brazil, Guterres also stated that the reduction in the average term of the Brazilian debt may become unsustainable. The sudden ministerial reform promoted in Brasilia did not impact the shares.

“Not only the dollar, but the future interest rates were also affected by the fiscal uncertainty,” says Romero Oliveira, head of variable income at Valor Investimentos. “The quality of the budget and its execution are being questioned a lot and the fear of a hole in the spending ceiling led the market to ask for a higher risk premium,” he says.

In addition, the pandemic numbers are quite worrisome, with new records in the moving average of daily deaths from Covid-19. Even with the advances in vaccination, concern about how long the pandemic will last in the country weighs on the short term and is reflected in the dollar, the country’s main risk indicator.

Monday was also a day of many departures from office in Brasilia. Fernando Azevedo e Silva, Minister of Defense, resigned after a request by Bolsonaro. The same happened to the Minister of Foreign Affairs, Ernesto Araújo, who since the election of US president Biden, had been under pressure to leave his post.

The last straw, however, was Araújo’s accusations that Senator Kátia Abreu was defending the Chinese Huawei in the 5G auction, which amplified Ernesto’s crisis with the Senate. José Levi, Federal Solicitor General (AGU), also left the government. André Mendonça, in turn, left his position as Minister of Justice to reassume the AGU position.

Despite denoting political instability, the “musical chairs” in the cabinet ministries has not yet taken a toll and is seen more as positive than negative by investors. “The signal is that Bolsonaro has sought more pragmatic and less ideological measures, which is certainly positive for the market,” says Oliveira, from Valor Investimentos.

Commodities

The Brazilian stock market managed to stay at the positive level thanks to the good performance of the shares of companies linked to commodities, such as iron ore and beef. Vale, Petrobras, Minerva and Taesa are among the highest risers.

The strong recovery of the economy in China, forecasted to 9%, and in the United States, forecasted to 7%, Brazil’s main trade partners, add to the devaluation of the real and lead to optimism about the rise in Brazilian exports.

“The Chinese package already contains a lot of infrastructure and what is being worked on in the United States is very focused on logistics and roads. This will continue to increase the demand for minerals and food”, says Welber Barral, former national secretary of Foreign Trade and strategist at Ourinvest bank.

Source: Veja