Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

Political risk is again emerging as a major source of market instability in Brazil, as a series of setbacks for President Jair Bolsonaro sucks the life out of a broad-based recovery that had appeared to be gathering momentum after March’s market crash.

Brazil’s status as the world’s No. 2 COVID-19 hot spot, Bolsonaro’s mishandling of the pandemic, his battles with the Supreme Court and Congress, and cabinet resignations have thrust Brasilia firmly into investors’ line of vision.

The growing sense of disarray is unnerving investors who fear Mr. Bolsonaro’s constitutional and institutional spats will put the government’s economic reform and austerity agenda on ice, and possibly into a more permanent deep freeze.

Story continues below advertisement

“Markets are starting to look at the politics again,” said Alexandre Song, partner at Macro Capital, a hedge fund in Sao Paulo.

“The price action hasn’t been too dramatic so far, but it is deteriorating. It feels like markets are partying next to a live volcano, and there’s smoke coming out,” he said.

The exchange rate and currency volatility, good real-time gauges of wider market jitters, reflect Brazil’s underperformance in recent weeks. The real has fallen 12 per cent against the dollar from its recent high on June 8, more than its peers and in many cases significantly more.

Volatility, meanwhile, has shot up almost to the levels it reached at the height of the global market crash in March.

Implied volatility on one-month dollar/real options last week rose to 25 per cent, the highest since March, when it reached 30 per cent, and on Friday three-month implied volatility spiked to 21.7 per cent, even closer to the March peak of 22.5 per cent.

The economic and public-health issues Mr. Bolsonaro is grappling with are not unique to Brazil. The world is tipping into its deepest recession in decades, the COVID-19 pandemic knows no geographical boundaries and people are dying around the world.

But according to Thomaz Favaro, director at Control Risk, a political risk consultancy in Sao Paulo, Mr. Bolsonaro’s handling of the crisis has put him in a select band of world leaders whose approval ratings have fallen during the pandemic.

Story continues below advertisement

“We now have a political crisis on top of a health crisis and economic crisis,” Mr. Favaro said.

“Very few countries have had such a dysfunctional response to COVID as Brazil, and that is adding fuel to the fire in the sense that ‘When is the economic recovery going to begin, and how steep or not will that recovery be?’” he said.

Even lingering speculation about military intervention to tighten Mr. Bolsonaro’s grip on power, however unlikely, has not disappeared.

‘FRAGILE SITUATION’

The economy is headed for its biggest crash since records began 120 years ago. Emergency spending, meanwhile, will push government debt to a record high, while the number of confirmed coronavirus cases passed the one million mark and more than 57,000 people have died.

Brazilian assets have rebounded from the March lows, in line with the global market recovery. But the benchmark Bovespa index is still 20- per-cent lower this year and the real is down 25 per cent, while the spread between short- and long-term interest rates is still more than double what it was in January.

Brazil’s prepandemic position was weaker than in many other countries, with anemic economic growth, high national debt and a fractious political climate.

Story continues below advertisement

In the past two weeks, respected Treasury Secretary Mansueto Almeida said he would step down, controversial Education Minister Abraham Weintraub quit and police arrested a former aide to Mr. Bolsonaro’s eldest son in a graft probe that threatens to undermine the President and ratchet up his battle with the judiciary.

None of these events on their own might have made any market ripples. But together, against a backdrop of recession and public-health emergency, they packed a punch.

“Investors ignore political risk until they don’t,” said Emily Weis, macro strategist at State Street in Boston.

“The pandemic has exposed some of the government’s fragilities, although this is not just an issue in Brazil. It’s a really fragile situation,” she said.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies