RIO DE JANEIRO, BRAZIL – According to AZ Quest’s Walter Maciel, the political scenario in Brazil today is “diametrically opposed” to March last year, when the government had no support in Congress and was stalled in relation to the pandemic.
The change in command at Petrobras had negative repercussions in the markets, but the government is in “the catbird seat” to emerge from this situation better than it entered by approving the emergency PEC (proposed constitutional amendment) and placing the country in a more sustainable fiscal situation.
“The government managed to build a dialogue with Congress, form a majority and get support from the leaders of the Chamber and Senate. Congress is discussing whether or not to introduce more reforms because we have already implemented the Social Welfare reform,” Maciel said.
If the proposal is given the go-ahead from Congress, it will be “a Fiscal Responsibility Law #2,” Maciel said. “If passed, the country will embark on a fully sustainable fiscal trajectory. It is a game changer. If all this confusion was needed to speed up the approval of this PEC, then this event was actually welcome.”
With a large part of the population in informal jobs, the manager said that opposing emergency aid and leaving the poorest adrift is unacceptable, and said that more privileged classes could contribute more.
He suggested more progressive tax rates, increased taxation on wealth transfers or inheritances, and even the inclusion of a biannual tax that is currently levied on general funds, for the restricted portfolios used by some family groups.
“There are funds that are forever deferring the tax, is that fair? Can we tax dividends, as long as the corporate tax is reduced? Because there are people who don’t have dividends because they earn in the corporate sector, in order to never pay taxes. Why doesn’t someone who owns a plane, a private jet, pay the IPVA (motor tax) on the plane?” he said.
“I think the wealthy in Brazil could contribute a little more without raising taxation on the corporate sector, which is already very high, it is messy and cascading.”
For the asset manager, the negative view of Brazil abroad “is even worse than reality,” and the way the government handles certain issues does not help. After president Jair Bolsonaro’s statements that he would appoint a new CEO for Petrobras, there was a reaction that spilled over to other state-owned companies and even private sector shares, such as banks.
“When you start opening a Pandora’s box, you create tremendous insecurity for investors,” he said. “Foreigners will only come back to Brazil when they see that we have implemented the reforms.”
This aversion predates Bolsonaro, and he mentioned that it was the government’s behavior between 2011 and 2016 that caused foreigners to reduce their position in the country. “If Brazil hits the populism switch, the exchange rate could reach R$6,” he said.
For the manager, if the government is responsible, even with no significant reforms, the exchange rate will converge downward. The current depreciation is a result of the fiscal and political disorganization Brazil is experiencing, and estimates the equilibrium exchange rate to be around R$4.50 per dollar.
In Maciel’s opinion, the perception of the value of state-owned companies depends on the degree of governance of the government itself. “Petrobras is very cheap, but if the government continues to signal that it will intervene, then it will become expensive,” he said.
“Petrobras has just endured a huge lawsuit by minority shareholders, who wanted to be reimbursed for the government’s intervention. This led to a huge loss not only for the company but also for the perception of governance in Brazil.”
According to the manager, even if IBOVESPA recovers the 120,000 points it had before the Petrobras affair, there is no need to talk about a bubble. Overall, among the large companies listed on the stock exchange there is a discount, given that large corporations managed to emerge stronger from the pandemic.
Founded in 2001 and associated with Azimut Group since 2015, AZ Quest is one of the largest and most traditional independent fund managers in Brazil.
Source: Valor