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  • Writer's pictureCommercial Awareness

Investment Fears from Brazil’s political instability

written by Stephanie Lai on 23/01/22

In October 2022, leftist Luiz Inacio Da Silva Lula was elected as the Brazilian president in a narrow win over right-wing Jair Bolsonaro, causing national political unrest due to the deep polarisation of the Brazilian population. President Lula has faced strong opposition since the beginning of his 2022 presidency from the loyal supporters of Bolsonaro, some of which do not accept his presidency, for a variety of reasons, including his incarceration for accepting bribes in his previous presidential terms. This has resulted in civil unrest, culminating in the recent storming of the Brazil’s capital, on 8 January 2023 where over one thousand people were arrested. Due to the large amount of unrest, investors, including Brazil’s own firms, are shying away from investing into the Brazilian economy from the potential risks created by the political instability. The deterrence of investors may greatly disadvantage Brazil that is endeavouring to strengthen their economy, especially amidst the current dire economic climate.

Impact on investments and socially:

Whilst external factors are often more impactful to emerging markets than domestic factors, the political instability is creating a lack of market confidence, weakening their economy, and causing the Brazilian Stock Exchange Index, Bovespa, to trade at a 36% discount to their 10 year average. The low market confidence and weakened economy has in turn impacted investment nationally by Brazilian firms as even Brazilian hedge funds, including Vinland Capital, are avoiding large bets in Brazil due to the market uncertainty caused by the political unrest. The fragility of Brazil’s market confidence will likely further shy away investors who may want safe investments, especially amidst the current international economic climate that faces high inflation and a potential recession in many nations.

Furthermore, Petrobas and Banco do Brazil faced substantial drops in their shares at the start of 2023 as investors fear Lula having an increasingly interventionist approach into these key businesses as he may use them to implement social policies that may not be economically efficient, which may negatively impact their profits. Lula may use Petrobas and Banco do Brazil to the benefit of the government as the Brazilian economy is facing limited growth, tight monetary policies for inflation, high unemployment and weak fiscal balance which limits the policy options that can be used to ameliorate the economy. If profits do drop in Petrobas, this could be detrimental to national production which supports the economy and general society throughout Latin America as they are the largest energy group on the continent, contradicting Lula’s aims of improving living standards. Further, more unrest may be created as criticisms have already formed around the ethics of using these firms that have minority shareholder investment for the creation of government policies. However, the American investment firm GQG has recently become one of the biggest minority shareholders in Petrobas by increasing their stake to over 5%, conveying that the political unrest has not been a complete deterrent to investments.

The future:

Despite the fears from some firms of the long-term political stability of Brazil, if Lula correctly manages public finances, these fears may be resolved. However, investors have critiqued Lula’s budget claiming that his plan to remove public debt does not add up, and is thus not feasible. Further, international economic instability, with inflation and potential recession, coupled with Lula’s ambitious economic measures to convert their projected deficit into a surplus through tax increases and spending cuts could deepen discontent from supporters of Bolsonaro. Hence, if political unrest does not come to an end, and if Lula’s policies do not have a positive effect on the Brazilian economy, investors will likely be highly deterred from investing in Brazil.

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