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Brazil markets tumble as President Bolsonaro pivots to interventionism, Petrobras' shares plunge 16%

Shares in Brazilian state oil company Petrobras plunged 16 percent after President Jair Bolsonaro changed the company's chief executive (AFP)Premium
Shares in Brazilian state oil company Petrobras plunged 16 percent after President Jair Bolsonaro changed the company's chief executive (AFP)

  • The real fell 2.2% at open, breaching the key 5.5 per dollar level that had been serving as support for the currency
  • There was no room to discuss the move that shows a president increasingly impatient with the government’s inability to appease his political base

Brazilian markets sank on Monday as investors saw Jair Bolsonaro’s move on the country’s state-controlled oil company as the latest sign the far-right president is willing to sacrifice the market-friendly policies sponsored by his economy minister to boost his popularity.

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

There was no room to discuss the move that shows a president increasingly impatient with the government’s inability to appease his political base, including truckers who have been threatening a strike over rising diesel costs, they added, requesting anonymity because the discussion isn’t public.

The following day, the president justified his decision by saying the oil company’s current management has shown “zero commitment to Brazil." Without elaborating, he added that he’s preparing to replace other parts of his administration that “may not be working," including in the nation’s power sector. On Monday, he told supporters in front of the residential palace that he’s not interfering in the company, but rather demanding “predictability and transparency" from it.

The real fell 2.2% at open, breaching the key 5.5 per dollar level that had been serving as support for the currency. Petrobras’s shares plunged 16% as analysts from Credit Suisse to JPMorgan cut their recommendations for the stock over the weekend. Brazil’s Ibovespa stock index declined 4.5%, with state-run companies leading losses.

“It’s certainly an indication policy could be headed in the wrong direction," said Brendan McKenna, a currency strategist at Wells Fargo in New York.

Confidence Hit

The move threatens to undermine investor confidence in Latin America’s largest economy at a time its recovery falters amid a second wave of Covid-19. With his popularity dropping to near record lows after a program of cash handouts to the poor expired in December, the president looks increasingly eager to please his political base to the detriment of the austerity agenda of Economy Minister Paulo Guedes.

“That reminds us of other moments of government meddling in economic policy," said Caio Megale, chief economist at XP Investimentos, recalling a 2013 decision by former President Dilma Rousseff to reduce 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 lifted their 2021 inflation forecasts above target and also raised their year-end interest rate estimate for the second straight week. Meanwhile, they cut their 2021 economic growth forecast for the third straight week.

James Gulbrandsen, chief investment officer for Latin America at NCH Capital, which has about $3 billion in assets under management, said the uncertainty leaves Brazil at risk of being shunned by investors.

“If Bolsonaro interferes with electricity pricing, it’s probably game over for his ability to attract foreign capital," he said.

Roberto Castello Branco, Petrobras’s current chief executive officer, has won investors’ praise by reducing the company’s debt and advocating its independence from the government. General Joaquim Silva e Luna, whose nomination needs to be approved by the state-controlled company board, has been in charge of the Itaipu hydroelectric dam for the past two years, and served as a defense minister in the previous administration.

Silent Guedes

Guedes has kept silent since Bolsonaro’s announcement on Petrobras because there’s nothing he can say about the decision to make it look better, according to three government officials close to him. Yet he’ll try to minimize investor concerns about political intervention by speeding up the approval of austerity measures in congress, the people said, asking for anonymity because the discussions aren’t public.

The economy ministry declined to comment.

Guedes has spent the past few days negotiating with lawmakers on the approval of a constitutional amendment that would make room for the government to provide another round of Covid aid to poor Brazilians in exchange for cuts in public spending in coming years. The bill will ensure fiscal credibility and predictability, and talks are going well as there’s an understanding that the country has no time to waste, the people said.

Despite losing several political battles recently, Guedes doesn’t intend to step down before leaving an economic legacy he can be proud of, the people added.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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