Brazil’s Political Unrest Could Affect Assets and Markets, Economists Warn

The invasion of the country’s Congress building and presidential palace on Sunday brings new uncertainty to investors in Brazil

Photo: Marcelo Camargo/Agência Brasil
By Bloomberg Línea
January 09, 2023 | 05:17 PM

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Bloomberg Línea — In the weeks leading up to Brazil’s presidential elections, some strategists, economists and political scientists warned of the risks of a possible “third round”, referring to a scenario in which the results of the polls would be challenged, and which would increase the uncertainty of investing in the country.

Silvio Cascione, director for Brazil of Eurasia, one of the most respected political risk consultancies in the world, was one of those who echoed such concerns.

This risk, which seemed to have been discarded in the last two months, especially after the inauguration ceremony of President Lula passed without incident, has returned to the radar with the episodes of Sunday in Brasilia, when demonstrators protesting against Jair Bolsonaro’s defeat and Lula’s victory at the polls invaded the buildings of the three branches of government - the Federal Congress, the Federal Supreme Court (STF) and the Palácio do Planalto.

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Those actions may rekindle an unpredictability that goes beyond the outlook for the country’s economy.

In the United States, the also unprecedented invasion of the Capitol in Washington by supporters of then-President Donald Trump in January 2021 did not stop the S&P 500 and Nasdaq from maintaining their streak of record highs in the days that followed. But that was favorable bull market timing.

The response in the Brazilian market will be known on Monday, as well as in the coming days, through the indices that best reflect investors’ perceptions of the risk of investing in the country.

The market’s (preliminary) view

“Markets and the economy are unlikely to be safe. Bloomberg Economics’ model suggests that an increase in political uncertainty around April 2017 levels could weaken the real by 1.8%, push stock prices down by 3% and trim around 0.7 percentage points from January’s economic activity,” said Adriana Dupita of Bloomberg Economics.

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For Luís Otávio Leal, chief economist at Banco Alfa, “the incident will affect foreign investors at first, and is a reason to think that the opening of the market [on Monday] will be very bad.”

According to Leal, the violent acts against the government and the legislature “question the notion of peaceful transition, and may affect the confidence of foreign investors in the country”.

The duration of the impact of the incident on the economic environment will depend, in the economist’s assessment, on the identification and bringing to account of the demonstrators.

For economist André Perfeito, citing a scenario of doubts about the country’s authority, and what he describes as “the silence of the military”, “it is reasonable to assume that the perception of risk will increase and, therefore, interest rates should rise with effects on the stock market and other assets”.

“The situation will probably be overcome, but these will be tense days on the markets and in the nation until [the presidential palace] Planalto restores order and the military definitively positions itself,” he said.

- With information from Bloomberg News.