- Benchmark Bovespa Index is up 6.4% year-to-date although the Brazilian real has depreciated 4.3% against the US dollar since President Lula took office on 1 January.
- Despite riots, widespread national unrest remains unlikely, although concerns remain about how new administration’s ramped-up spending plans could impact fiscal balance.
The sight of thousands of supporters of former president Jair Bolsonaro storming the Brazilian capital on Sunday has yet to have a noticeable impact on investor sentiment towards Latin America’s largest economy but the deep divisions the attack highlighted could cast a long shadow.
The invasion led to damage of government buildings in Brasília, although police moved swiftly to contain the violence. Armed forces have been deployed across Brazil to head off further protests that seek the overthrow of President Luiz Inácio Lula da Silva who was inaugurated on 1 January.
“Lula won a third term as president by the tightest of margins and the storming of government buildings by supporters of the outgoing president illustrate a deeply divided nation,” says Kunjal Gala, head of Emerging Markets at Federated Hermes Limited.
The attack by a group of the losing candidate’s most ardent supporters does not necessarily portend widespread national unrest
Jason DeVito, an emerging market debt portfolio manager at Federated Hermes, says that while the election was fiercely contested and emotions ran high on both sides, the attack by a group of the losing candidate’s most ardent supporters does not necessarily portend widespread national unrest.
Concerns, however, remain that the new administration could ramp up government spending following campaign pledges to prioritise social issues and extend fuel tax exemptions. President Lula’s choice of finance minister, Fernando Haddad, has also been met with a muted response from investors.
“The concern rests on whether President Lula proposes an overly socialist agenda on the back of the already strained fiscal accounts,” DeVito adds. “However, our belief is that his proposals will be more bark than bite. While we will see increase in fiscal spending on social programmes and greater utilisation of state lending institutions, we do not expect to see radical fiscal expansion.”
Brazil 10-year government bond yields
Government debt stood at 74.5% of Gross Domestic Product (GDP) in November1 and Brazil’s centre-right-leaning Congress is also likely to ensure that any decisions on the national budget are subject to intense scrutiny. The Brazilian real has depreciated 4.3% against the US dollar since President Lula took office at the start of the year2.
Any significant shift in fiscal policy could have an impact on bond markets. Yields on 10-year Brazilian government bonds spiked to above 13% in early January following the inauguration but have since dipped to 12.5% as at 16:30 GMT on Thursday3.
Inflation in the country dipped in 2022 from a peak of 12.1% in April to 5.8% in December on the back of aggressive monetary tightening4.
“Federated Hermes Global Emerging Markets fund holds an underweight position on Brazil in light of the vulnerability of the Brazilian economy, lack of meaningful reforms, fiscal fragility, global recessionary risk and domestic squeeze on consumption, as well as the fallout from central bank hawkish moves to fight off double-digit inflation,” Gala adds.
Will Brazilian equites maintain strong performance this year?
Brazil’s benchmark Bovespa Index was up 13.9% in 2022 in US dollar terms compared to 20.2% fall posted by the MSCI Emerging Market Index over the same period. The Bovespa is up 6.4% year-to-date to 11 January5.
Brazil’s most recent democracy was established in 1985, following two decades of military rule.
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1 Brazil’s public sector gross debt drops to 74.5% of GDP in November | Reuters
2 Bloomberg as at 12 January
3 Bloomberg as at 12 January
4 Brazil’s 2022 inflation slows sharply, misses government target | Reuters
5 Bloomberg as at 12 January