Following the inauguration of controversial President Jair Bolsonaro, Brazilian stocks and the related exchange traded funds rallied last week. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest Brazil ETF trading in the U.S., surged nearly 10% on the week.
Bolsonaro has promised wide-ranging reforms aimed at stomping out corruption in Latin America’s largest economy. His ability to make good on the promised reforms is seen as pivotal to the fortunes of Brazilian assets in 2019. Brazil’s economy is expected to post GDP growth of just over 2% this year and 2.7% in 2020.
“Bolsonaro has continued to advocate for a generally business-friendly agenda since he won the second round of the presidential election on Oct. 28,” said Fitch Ratings. “His economic platform included fiscal consolidation, pension reform, simplification of the tax code, privatization and formal independence for the central bank. Notably, some appointments to his administration made in November, including to the national treasury, central bank and development bank BNDES, suggest that he is forming a market-friendly economic team.”
Markets observers were optimistic that Bolsonaro’s economic cabinet, led by former investment banker Paulo Guedes, will push through reforms needed to cut down the country’s 180 billion reais, or $47.31 billion, deficit and restore confidence and growth to the ailing economy.
No Guarantees
What politicians say on the campaign trail and what is actually delivered when they take office are often two different things. Additionally, some analysts are concerned Bolsonaro could move Brazil too far to the right. Bolsonaro, a former army captain who did not disfavorably view the 1964-85 military dictatorship, has been adding military men onto his cabinet since the victory last month, the Financial Times reports.
Bolsonaro’s party made notable gains in Brazil’s congress, but that body remains highly divided, which could impair the new president’s ambitious reform agenda.
“Congressional challenges to fiscal consolidation and pension reform are also likely to mean implementation challenges and risks lie ahead,” said Fitch. “Despite his party making substantial gains in Congress at the general elections, the legislature continues to be highly fragmented. Bolsonaro will require significant support from other parties in order to pass legislation, while pension reform will likely require a constitutional amendment or 60% support to pass in Congress.”
Investors added $1.21 billion to EWZ in the fourth quarter.
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