Brazilian markets plunge after President Bolsonaro removes head of state oil firm

Petrobras's shares fell 19% as analysts cut their recommendations on the company

Roberto Castello Branco was replaced as CEO of Brazil's state-run oil company Petrobras by president Jarir Bolsonaro on Friday. The move sparked a widespread sell-off in Brazilian equities when marketShow more

Brazilian markets plunged on Monday after President Jair Bolsonaro removed the head of state-controlled oil company, the latest sign that his government is rolling back market-friendly policy initiatives to shore up his sinking popularity.

Mr Bolsonaro’s decision on Friday to replace the University of Chicago-educated economist at the helm of Petroleo Brasileiro, Roberto Castello Branco, after a disagreement over fuel prices surprised even his inner political circle, according to two government sources.

The Brazilian real fell 2.4 per cent on Monday, breaching the key level of 5.5 per dollar, even after the central bank stepped into the market with an offer of currency swaps. Petrobras’s shares plunged 19 per cent as analysts from Credit Suisse Group to JPMorgan Chase cut their recommendations for the stock over the weekend. Brazil’s Ibovespa stock index declined 5.1 per cent, with state-run companies leading losses.

“It’s certainly an indication policy could be headed in the wrong direction,” said Brendan McKenna, a currency strategist at Wells Fargo in New York.

There was no room to discuss the move, which shows a president increasingly impatient with the government’s inability to appease his political base, including truckers who have been threatening a strike over rising diesel costs, the sources added.

The president on Saturday justified his decision by saying the oil company’s current management has shown “zero commitment to Brazil”. He added that he’s preparing to replace other parts of his administration that “may not be working”, including in the nation’s power sector. On Monday, he told supporters in front of the residential palace that he’s not interfering in the company, but rather demanding “predictability and transparency” from it.

The move threatens to undermine investor confidence in Latin America’s largest economy at a time its recovery falters amid a second wave of Covid-19. Mr Bolsonaro’s popularity is dropping to near record lows after a programme of cash handouts expired in December, with an MDA poll published on Monday showing his approval rating fell 8 percentage points to 32.9 per cent over the past four months. That has pushed him to find ways to please his political base to the detriment of the austerity agenda of economy minister Paulo Guedes.

“That reminds us of other moments of government meddling in economic policy,” said Caio Megale, chief economist at XP Investimentos, recalling a 2013 decision by former President Dilma Rousseff to reduce electricity prices. “The market wants to know if the president’s decision is a new guideline for economic policy.”

Economists surveyed by the monetary authority lifted their 2021 inflation forecasts above target and also raised their year-end interest rate estimate for the second straight week. Meanwhile, they cut their 2021 economic growth forecast for the third straight week.

James Gulbrandsen, chief investment officer for Latin America at NCH Capital, which has about $3 billion in assets under management, said the uncertainty leaves Brazil at risk of being shunned by investors.

“If Bolsonaro interferes with electricity pricing, it’s probably game over for his ability to attract foreign capital,” he said.

Outgoing chief executive Roberto Castello Branco won investors’ praise by reducing the company’s debt and advocating its independence from the government. His replacement, General Joaquim Silva e Luna, whose nomination needs to be approved by the state-controlled company's board, has been in charge of the Itaipu hydroelectric dam for the past two years, and served as a defence minister in the previous administration.

Mr Guedes has kept silent since Mr Bolsonaro’s announcement on Petrobras because there’s nothing he can say about the decision to make it look better, according to government officials close to him. Yet he’ll try to minimise investor concerns about political intervention by speeding up the approval of austerity measures in congress, the officials said.

The economy ministry declined to comment.

Mr Guedes has spent the past few days negotiating with politicians on the approval of a constitutional amendment that would make room for the government to provide another round of Covid aid to poor Brazilians in exchange for cuts in public spending in coming years. The bill will ensure fiscal credibility and predictability, and talks are going well as there’s an understanding that the country has no time to waste, sources said.

Despite losing several political battles recently, Mr Guedes doesn’t intend to step down before leaving an economic legacy he can be proud of, the sources added.