Petrobras-induced sell-off makes Brazil valuations look appealing

  • President Bolsonaro removes Petrobras head and signals his reformist Finance Minister Guedes is further sidelined
  • Next election in October 2022: Bolsonaro has a low opinion poll score and weak control of Congress amid 14% unemployment
  • But commodity exports (c7% of GDP) and equities valuation (11x PE, a c15% discount to 5y median) are supportive factors
Petrobras-induced sell-off makes Brazil valuations look appealing

The next general election in Brazil is about 20 months away and populism is clearly going to drive economic policy more than reform. The abrupt removal of the CEO of Petrobras on 19 February, by President Jair Bolsonaro, confirms this shift but should not come as a shock. With commodity prices a positive tailwind and valuations now attractive (after the sharp sell-off), we turn less negative on Brazil relative to other large EM equity markets.

Brazil equities: cheaper vs history than most of top 10 EMs

Brazil equities fell c5% and the FX rate fell c2.5% in response to the news. But this should not be a shock to anyone witnessing the tussle over renewing the Covid-19 fiscal stimulus, which expired in December, the election of leaders of the houses of Congress with less control and less commitment to reform than their predecessors, the rise in unemployment (up 2pp to 14% since the 2018 election) and the deterioration of Bolsonaro's approval ratings (disapproval is 43% versus approval of 31%) back to levels seen prior to the Covid-19 fiscal package.

We are under no illusions about the negative signals sent by the change at Petrobras (we list these below) but we also argue that commodity prices should be tailwind for the Brazil economy (commodity exports are c7% of GDP), and particularly the largest listed stock, iron ore producer Vale (16.1% of MSCI Brazil and 13.3% of the local index), and valuation is now looking more compelling. The local IBOV index is on a forward PE of 11.3x, a c15% discount to the 5-year median (the largest discount among the larger emerging markets).

President Bolsonaro rating back to pre-Covid stimulus level

Brazil unemployment is 2pp higher since Bolsonaro elected

Confirmation that populism will prevail over reform

"Admitting my ignorance in many areas is a sign of humility. I'm certain I know a lot more about politics than [Finance Minister] Guedes, but he knows much more about the economy than I do." President Jair Bolsonaro in January 2019.

The replacement of the CEO of Petrobras by President Bolsonaro, on 19 February, sends a number of negative signals:

  1. Reform agenda – former Petrobras CEO Roberto Castello Branco was regarded as a technocratic ally of Finance Minister Paulo Guedes (who, in turn, is regarded as the champion of structural economic reform and policy orthodoxy in the current government), whereas Bolsanoro's replacement is Joaquim Silva e Luna, a former Chief of Army Staff, whom Bolosonaro appointed first as Minister of Defence (Feb 2018 to Jan 2019) and then as head of the Itaipu Binacional (the operator of the massive 14GW hydroelectric dam).

  2. Populism – a strike by truckers, in protest at the fourth retail price increase this year, likely prompted the action by Bolsonaro to remove the Petrobras CEO and promise a temporary suspension of fuel taxes.

  3. Unilateral and ad hoc policy – given Bolsonaro's self-confessed lack of expertise in economic policy, this latest move appears to confirm a shift from the systematic approach of Guedes to an ad hoc, highly politically sensitive one driven by Bolsonaro.

  4. Price controls – government control of the retail prices of gasoline, diesel and gas canisters could be on the way back (a practice which ended with the impeachment of former President Dilma Roussef in 2016).

  5. SOE Governance – the independence of the Board of Directors in publicly-listed state-owned enterprises (eg Electrobras and Banco de Brasil, as well as Petrobras) is in question.

Brazil needs structural reform: (1) fiscal deficits

Brazil needs structural reform: (2) government debt is high

Related reading

Brazil: Congress leaders save Bolsonaro from impeachment but may not help reform (February 2021)

Commodity food prices highest for six years: EM trade winners and losers (January 2021)

Commodity price beneficiaries in EM (October 2020)


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