Emerging Markets: The Week Ahead (Feb 25-Mar 1), Waxing Optimistic About Brazil's Economy

By Steven Levine, Senior Market Analyst, Interactive Brokers

Brazil’s calendar will be somewhat light on economic releases in the week ahead, with updates that include unemployment, GDP, consumer confidence and manufacturing, However, some political risk appears to have risen to the fore, amid reports that Secretary General Gustavo Bebianno – a close ally of far-right President Jair Bolsonaro – had resigned Monday over alleged improper use of campaign funds during the 2018 election.

The shift could throw a wrench into the country’s reform agenda – notably around the issue of pensions.

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Marc Chandler, chief market strategist at Bannockburn Global Forex, noted:

“Bebianno may be sorely missed as the government tries to ensure that pension reform stays on track.” He said that pension reform as is “seen as key to a host of other reforms, but in order to secure it, the government is willing to tactically retreat on measures so as not to antagonize the needed support”.

Chandler added that this “includes shelving plans to cut subsidies and open the economy to more foreign competition”.

Against this backdrop, he observed the dollar testing BRL3.80, after forging what seemed to be a “good base” near BRL3.70.

The pension reform may be submitted as soon as Wednesday to the lower house, which some analysts have said could produce around US$350bn in cost savings for the country over the next ten years.

Brazil’s real has risen over 4% against the U.S. dollar year-to-date, and futures market analyst Stephen Maass noted in a recent Hightower Report that while “Brazilian economic data has been lukewarm at best, many investors are hopeful that new President Bolsonaro will be able to enact reforms”.

Maass added that if Brazil’s local currency continues to gain ground, it will alleviate pressure on producers to export their supplies to foreign customers. He said this would impact the export of soybeans and coffee, both of which have significant domestic consumption. “The strength of the real will also play into calculations for Brazil’s sugar mills before they start operations in April, as a rising currency combined with stronger energy prices could help to keep ethanol’s share of crushing above the 60% level.”

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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