Has Brazil’s populist bark gone quiet?

May 13, 2021

Jorge Amato

Head – Latin America Investment Strategy

view of Rio de Janeiro from Sugarloaf Mountain

SUMMARY

Attempts will be made on Brazil's executive and legislative side to work on reforms and to maintain a fiscal anchor, despite the challenges posed by COVID related spending. Ahead of any such shift, we already see a significant improvement in Brazilian market dynamics.

We are not of the view that Brazil’s current administration will make a sharp turn to populism, but rather quite the opposite. Attempts will be made on the executive and legislative side to work on reforms and to maintain a fiscal anchor, despite the challenges posed by Covid related spending.

We’ve seen significant improvement in dynamics in Brazil. These have translated in a shift in momentum and market sentiment and price levels. Over the past month, the BRL rallied nearly 9% from 5.70 to 5.20 and equities measured in USD terms are also up almost 10%. This compares with -1.5% for global equities and the S&P.

On the political front, polls are showing former left-leaning President Lula leading in a potential 2022 candidacy. We believe it is too early to price in next year’s elections. In addition, a Lula advantage in the polls is more likely to push the current administration -and congress- to increase their efforts to pass reforms and stabilize the economy in our view.

Average new Covid cases have stagnated close to 80k per day over the past week. 54mm vaccine doses have been administered thus far and we continue to expect vaccinations to ramp up in the coming months. Retail & recreation mobility indicators show the population has been more active since late March, early April. This is totally consistent with the fact that average new daily cases peaked in that period and have fallen since.