Bolsonaro’s Trump-Like Election Ploy Rattles Brazil Traders
(Bloomberg) — Jair Bolsonaro’s campaign against Brazil’s voting system and push to boost social spending ahead of next year’s presidential vote are blunting the effects of one of the world’s most aggressive monetary policies on markets.
After the central bank delivered the steepest rate hike in almost two decades earlier this month, the jolt to the real lasted just a few hours before being overrun by growing political tensions tied to the 2022 vote. Policy makers, criticized for having to play catch-up to markets earlier in the year, are seeing inflation expectations continue to rise despite pledges to deliver another 100 basis points or more if needed in the next meeting.
“The political situation, with the populist temptations ahead of a difficult election in 2022, are causing fiscal uncertainties, and will likely only grow as the elections near,” said Mariam Dayoub, the chief economist at asset manager Grimper Capital. “Fiscal risks should limit how much the real can rally even with a more hawkish central bank.”
In a page out of the play book of former U.S. President Donald Trump, Bolsonaro has ranted almost daily against the country’s electoral system, name-calling Supreme Court justices and casting doubt on Brazil’s electronic voting process ahead of his re-election bid. Not even back-to-back defeats of the bill that would reinstate paper ballots in congress have calmed waters.
At the same time, with the pandemic eroding his base of support, Bolsonaro has pledged a massive increase in social programs, rekindling investor concerns Brazil will overspend, derailing the fragile fiscal accounts Economy Minister Paulo Guedes was supposed to fix.
The country’s bond risk as measured by five year credit-default swaps is at its highest level since May, posting one of the worst performances in the world in the past month. The currency, which had rebounded sharply from its March low, has been swinging wildly intraday and is down 1.4% since the Aug. 4 decision to 5.24 per dollar. That’s the worst among Latin American currencies in that span.
“It’s very clear that if it wasn’t for fiscal and political noise, the real would be trading stronger than 5 per dollar, and markets would be forecasting a more benign trajectory for inflation,” said Tony Volpon, a former central bank director who’s an investment strategist at Wealth High Governance.
The turbulent political and fiscal scenario is also hampering the central bank’s ability to control inflation expectations. Bank of America and Barclays both increased consumer price estimates in the days since the decision. Most analysts see consumer prices at 7.05% by year-end, above the 3.75% target. More worrisome is that they also see inflation above target in 2022.
Central Bank President Roberto Campos Neto acknowledged the challenges of anchoring inflation expectations in an online event last week and said markets are concerned with Brazil’s fiscal situation, a country that was already highly indebted prior to the pandemic.
“Any news that affects debt levels generates a lot of noise,” he said.
A day earlier, monetary policy director Bruno Serra said volatility in the real is running higher than he would prefer.
On multiple occasions this month, markets have pared or reversed gains due to political noise stemming from Bolsonaro’s insistence that the electoral system is rigged against him. A canceled meeting between Bolsonaro and top court officials along with multiple probes into his actions, have taken the air out of rallies and pushed up the interest rate curve. Over the weekend, Bolsonaro announced on social media that he intends to request the impeachment of two members of the top court.
On the day of a Lower House vote on the paper ballot push, the Armed Forces paraded tanks through the streets, adding to the nerves in Brasilia. Opponents warn that Bolsonaro is paving the way to refuse to accept the results of next year’s vote if he loses, akin to what Trump did.
The presidential press office didn’t reply to a request for comment on Bolsonaro’s comments and the impact on markets.
The swaps rate for January 2029 now sits above 10%, the highest level since 2018. The Selic key rate, which was cut to a record low 2% during the throes of the pandemic, has shot back to 5.25% this year with expectations that it could rise to as high as 8% by year-end.
It’s not only political noise that’s worrying investors. Economists see the fiscal deficit at 7.2% this year and 6.4% in 2022, according to a Bloomberg survey. Campaign spending to curry favor with voters, including a revamped welfare program, could worsen those numbers.
Hedge fund Verde Asset Management raised concerns about an “erratic” fiscal path last week and said the country is “dangerously flirting” with its own past. Brazil’s net debt to GDP remains above 60%, the highest since the early aughts. More spending would not only deteriorate the country’s fiscal standing but also contaminate inflation expectations.
A group of businessmen and investors signed a manifesto in defense of Brazil’s democracy last week in response to Bolsonaro’s rhetoric. It’s the second time such a group speaks up against the government. The first one was earlier this year, when bankers and billionaires protested the administration’s handling of the pandemic. On both occasions the letters stopped short of naming Bolsonaro.
“Portfolio managers are very skeptical with Brazil,” said Luiz Fernando Figueiredo, the chief executive officer of Maua Capital and a former central bank director who signed the manifesto. “Between the handling of the pandemic, the Amazon, sustainability, the long term growth, the image is just really bad.”
(Updates with latest inflation expectations in eighth paragraph and Bolsonaro’s comments on top court in 12th paragraph.)
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