By
Reuven Benichou
26-02-2021
BRL is Cheap, But Not Yet a Buy
(4 min read)
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Brazil’s financial markets have tumbled this week tumbled after President Jair Bolsonaro’s 19 February decision to fire the head of state-controlled oil company Petrobras following clashes over fuel price hikes. It is the fourth time this year that Bolsonaro has criticized the company for rising fuel prices, and he introduced a two-month reduction in federal diesel taxes from 1 March. Hikes in fuel prices are usually the final straw that leads to public outcry. And with Bolsonaro’s popularity falling after the expiry of pandemic aid, the move is likely an attempt to shore up his popularity ahead of the 2022 elections.
However, Bolsonaro’s unilateral decision concerned investors. The risk is rising that the government takes a more interventionist approach and avoids making difficult decisions to control the fiscal situation. History suggests that leaders in Latin America tend to turn populist as presidential elections near. In the 2019, Argentinians opted to take back Christina Kirchner and punished incumbent Mauricio Macri, who chose steady reforms after 12 years of free-spending populism.
Since 2018, Brazil’s economy minister Paulo Guedes has struggled to implement his ambitious reform agenda. The economy remains one of the most protectionist in the world, and industry lobbies are very powerful. The key question now is whether Bolsonaro will risk backing Guedes ahead of the presidential election. The dismissal of Petrobras CEO – who was a close friend of Guedes – is a negative signal.
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