In October 2022, leftist Luiz Inácio Lula da Silva narrowly won the Brazilian presidency over right-wing Jair Bolsonaro, leading to significant national political unrest due to the deep polarization within the Brazilian population. President Lula has faced strong opposition since the beginning of his 2022 presidency from Bolsonaro’s loyal supporters, many of whom do not accept his presidency. This opposition is partly due to his previous incarceration for accepting bribes during an earlier term, and the perception that the Supreme Federal Court (STF) acted unjustly to favor Lula by annulling his convictions. This has resulted in civil unrest, culminating in the recent storming of Brazil’s capital on January 8, 2023, when over a thousand people were arrested. Consequently, the ongoing unrest has deterred investors, including Brazilian firms, from investing in the Brazilian economy due to the potential risks associated with political instability. This hesitation from investors may significantly hamper Brazil’s efforts to strengthen its economy, especially given the current dire economic climate
Impact on Investments and Society
While external factors often have a more substantial impact on emerging markets than domestic ones, Brazil’s political instability is currently reducing market confidence, weakening the economy, and causing the Brazilian Stock Exchange Index, Bovespa, to trade at a 36% discount compared to its ten-year average. Low market confidence and a weakened economy have, in turn, impacted national investment by Brazilian firms. Even Brazilian hedge funds, such as Vinland Capital, are avoiding large bets in Brazil. The fragility of Brazil’s market confidence will likely further disincentivize investors who seek safe investments, especially amid the current international economic climate characterized by high inflation and the potential for a recession in many nations.
Furthermore, Petrobras and Banco do Brasil experienced substantial drops in their share prices at the start of 2023 as investors fear that Lula will adopt an increasingly interventionist approach with these key businesses. The concern is that Lula might use these entities to implement social policies that may not be economically efficient, negatively impacting their profits. Lula may leverage Petrobras and Banco do Brasil to benefit the government, given that the Brazilian economy is facing limited growth, tight monetary policies to control inflation, high unemployment, and a weak fiscal balance, which constrain policy options for economic improvement. If profits drop in Petrobras, it could be detrimental to national production, which supports the economy throughout Latin America as the largest energy group on the continent. This could contradict Lula’s aim of improving living standards. Additionally, unrest may increase as criticisms have already emerged regarding the ethics of using firms with minority shareholder investment for government policy creation. However, it is worth noting that the American investment firm GQG has recently become one of the largest minority shareholders in Petrobras by increasing its stake to over 5%, indicating that political unrest has not entirely deterred investments.
The Future
Despite some firms fearing the long-term political instability in Brazil, these concerns may be alleviated if Lula manages public finances effectively. However, investors have criticized Lula’s budget, arguing that his plan to overlook public debt is not feasible. Moreover, international economic instability, with inflation and the potential for recession, combined with Lula’s ambitious economic measures to convert Brazil’s projected deficit into a surplus through tax increases and spending cuts, could exacerbate discontent among Bolsonaro supporters. Therefore, if political unrest persists and Lula’s policies do not positively impact the Brazilian economy, investors will likely be further deterred from investing in Brazil.
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