Brazil’s Political Instability Leads To Investment Fears

By Stephanie Lai, Head of Research at King’s Commercial Awareness Society

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 term. This has resulted in civil unrest, culminating in the recent storming of Brazil’s capital, on 8 January 2023, when 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 due to the potential risks created by the political instability. The deterrence of investors may greatly disadvantage Brazil in its endeavour to strengthen its economy, especially amidst the current dire economic climate.

Impact On Investments And Society

Whilst external factors are often more impactful to emerging markets than domestic ones, the political instability is reducing market confidence, weakening their economy, and causing the Brazilian Stock Exchange Index, Bovespa, to trade at a 36% discount compared to their 10 year average. Low market confidence and a weakened economy has, in turn, impacted national investment by Brazilian firms with even Brazilian hedge funds, including Vinland Capital, are avoiding large bets in Brazil. The fragility of Brazil’s market confidence will likely further disincentivise 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 will exercise an increasingly interventionist approach into these key businesses, using them to implement social policies that may not be economically efficient, thus negatively impacting 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 limit the policy options to ameliorate the economy. If profits drop in Petrobas, this could be detrimental to national production which supports the economy throughout Latin America as 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 with 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 some firms fearing the long-term political instability 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 ignore public debt is not feasible. Further, international economic instability, with inflation and the potential for recession, coupled with Lula’s ambitious economic measures to convert Brazil’s projected deficit into a surplus through tax increases and spending cuts could increase discontent from Bolsonaro supporters. Hence, if political unrest does not come to an end and Lula’s policies do not have a positive effect on the Brazilian economy, investors will likely be deterred from investing in Brazil.