Government bust-up drives Brazil off the rails

Bolsonaro is under criminal investigation and could be impeached© Getty

(Image credit: Jair Bolsonaro © SERGIO LIMA/AFP via Getty Images)

published 9 May 2020

“Bust-up in Brasilia”, says The Economist. Latin America’s biggest economy is contending with the Covid-19 pandemic and an economic crisis, but the government has descended into infighting. Popular justice minister Sérgio Moro has resigned, openly accusing president Jair Bolsonaro of obstructing justice. That has dealt a serious blow to the president and sparked destabilising talk of impeachment.

The drama is distracting attention from the fight against Covid-19, senator and former Bolsonaro ally Sergio Olimpio Gomes told The New York Times. Throw in a worsening economy and Brazil is facing “a perfect storm”.

The end of an era

Brazil had barely recovered from its last recession, a slump that saw GDP fall by more than 7% and only ended in 2017. Bolsonaro was elected in late 2018 on a platform of economic liberalisation and anti-corruption. That drove a huge rally in the local equity market, yet the benchmark Ibovespa index has since relinquished all of those gains, tumbling almost 35% from a peak in January.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Bolsonaro has fallen out with major political allies and members of his family are under criminal investigation. To make matters worse, Brazil is a significant exporter of soy, oil and metals, leaving it dangerously exposed to slumping commodity prices.

Brazil has long been “mired in debt and inertia”, say Bryan Harris and Andres Schipani for the Financial Times. There were hopes that Paulo Guedes, Bolsonaro’s pro-market finance minister, could turn things around, yet his project has been undone by virus-induced spending.

A 1.2trn reals (£174bn) emergency package cancels out the planned savings from his flagship pension reform. Analysts wonder whether Guedes will soon follow the justice minister out of the door. His “entire agenda has been compromised”, says Elias Vaz, a member of parliament.

Crisis spending will soon propel Brazil’s public debt towards 90% of GDP, says Alberto Ramos of Goldman Sachs. That would be a record and is especially elevated for an emerging economy. Brazil’s budget deficit is likely to hit 8% of GDP this year.

Bolsonaro’s failures could mark the end of a long period of strength, writes John Authers on Bloomberg. Between 2002 and 2008 the local market returned more than 66% each year thanks to surging Chinese commodity demand.

Yet now the pandemic has destroyed demand for commodities and “cruelly exposed” political incompetence in Brazil and Mexico, the region’s two biggest economies. Their currencies and markets have fallen hard, but there are few catalysts in sight for a rally this time round. There is better value on offer in other regional markets.

Explore More

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.