Macro: Sandcastle economics
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The outlook remains hazy for BRL
John J. Hardy
Chief Macro Strategist
Summary: Brazilian president-elect Jair Bolsonaro's win has attracted positive sentiment but the BRL outlook remains hazy.
Jair Bolsonaro's election win has seen sentiment for Brazilian assets rebound in the hope of pro-market policies from the right-wing leader and Chicago-trained 'super-advisor' Paolo Guedes. But can such a stance survive in Brazil's unique climate?
Credit spreads have improved sharply in the Brazilian real’s favour, essentially matching the lowest levels since the spring of this year and generally outperforming most other emerging market currencies with notable USD-denominated debt.
The outlook for BRL, however, remains hazy. On the one hand, the market-friendly stance of an adviser like Guedes looks great in principle, but could such views suddenly recede if an issue arises where the popular majority is looking for a handout?
Bolsonaro, for instance, was initially in favour of the truckers who shut down the country earlier this year over fuel price rises, and chaos only averted when expensive subsidies were announced. Could Mr. Bolsonaro be bullied by the crowd on an issue like this or even more importantly, the regressive and expensive pension system, which simply must be changed to avert a longer run fiscal disaster?
I suspect that the Brazilian president-elect’s priorities will mostly be geared toward public order and keeping "the crowd" happy, with less of a focus on liberal economic policy, but time will tell and Bolsonaro could surprise in either direction.
For more on Bolsonaro and Brazil, see Saxo Bank Head of Equity Strategy Peter Garnry's take on Brazilian stock markets.
Credit spreads have improved sharply in the Brazilian real’s favour, essentially matching the lowest levels since the spring of this year and generally outperforming most other emerging market currencies with notable USD-denominated debt.
The outlook for BRL, however, remains hazy. On the one hand, the market-friendly stance of an adviser like Guedes looks great in principle, but could such views suddenly recede if an issue arises where the popular majority is looking for a handout?
Bolsonaro, for instance, was initially in favour of the truckers who shut down the country earlier this year over fuel price rises, and chaos only averted when expensive subsidies were announced. Could Mr. Bolsonaro be bullied by the crowd on an issue like this or even more importantly, the regressive and expensive pension system, which simply must be changed to avert a longer run fiscal disaster?
I suspect that the Brazilian president-elect’s priorities will mostly be geared toward public order and keeping "the crowd" happy, with less of a focus on liberal economic policy, but time will tell and Bolsonaro could surprise in either direction.
For more on Bolsonaro and Brazil, see Saxo Bank Head of Equity Strategy Peter Garnry's take on Brazilian stock markets.
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