EMTA SPECIAL SEMINAR: BRAZIL: BOLSONARO'S FIRST 100 DAYS
Tuesday, February 12, 2019
The Langham Hotel - Madison Room
250 Franklin Street
Boston, MA
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Alberto Bernal (XP Securities) - Moderator
Kevin Ivers (DCI Group)
Palak Patel (Fidelity Investments)
Tina Vandersteel (GMO)
Bertrand Delgado (Societe Generale)
5:00 p.m.
Cocktail Reception
Registration fee for EMTA Members US$95 / US$695 for Non-members.
Additional Support Provided by MarketAxess, Societe Generale and XP Securities.
First 100 Days of Bolsonaro Administration Also Discussed in Boston
Due to the success of EMTA’s sold-out New York City Seminar on the First 100 Days of the Bolsonaro Administration in Brazil, EMTA held a similar event in Boston on February 12, 2019. 50 market participants attended, with the program sponsored by MarketAxess, Societe Generale and XP Securities.
In his introductory remarks, moderator Alberto Bernal (XP Securities) reviewed the results of a recent client survey, which revealed that 75% of respondents expected at least minimal progress on Brazilian pension reform. If the Temer proposal was finally enacted, the BRL would rally to 3.6, according to the local clients in the survey, while the absence of any movement would result in a decline of 4.2 reais per dollar.
Kevin Ivers (DCI Group) analyzed the recent elections of the Brazilian House and Senate leaders. The victory of Rodrigo Maia in the House was a positive development; he will serve “as an honest partner for the President…and I believe he is in line with the need for reforms.” Ivers ex-pected the House generally to be “somewhat, if not very, helpful” in this regard. On the Senate side, the surprise defeat of front-runner Renan Calheiros (whom Ivers had warned at the NYC seminar could pose a serious obstacle to reform) still leaves prospects in the Upper House un-clear. As a result of his loss, Calheiros “is out for vengeance, and the question is ‘what damage can he do’ to the pension and judicial reform debates –I’m sure he will want to sabotage [re-forms].” Ivers stressed how complicated passing legislation is in Brazil, while also pointing out that President Bolsonaro is still recovering and has yet to clarify his stance on reforms. “Once he stops being just an apparition, that’s when you might have an idea where we are going,” he summarized.
Fidelity Investment’s Palak Patel acknowledged he was “fairly pessimistic” in his personal view about the chances that pension reform would be approved, noting the fragmentation of Brazil’s Congress, while there remains no clear commitment by the administration to the reform agenda. This could be tied to the fact that Bolsonaro was elected on an anti-establishment mandate, not a reform push. Patel argued that investors were not positioned for what he considered his base case of “highly diluted reform…with retirement at 57 for women and 62 for men…and where the economic benefits won’t be felt until the mid 2020s.”
In concurrence was Tina Vandersteel, Head of GMO’s EM debt team and EMTA Board Mem-ber. Vandersteel noted that these discussions have been on-going for decades, and the lack of progress has continued while the debt/GDP ratio worsens. “My pessimism on pension reform is based not only on the difficulty in passing it, but also the ease of reversing it,” she cautioned, specifying that any measures that don’t immediately come into effect could be undone before they are enacted.
Societe Generale’s Bertrand Delgado envisioned a “watered-down” reform bill being passed. Investment decisions will be delayed and won’t happen before the 3Q as businesses seek great-er clarity. Delgado predicted economic growth of 2 to 2.5% in 2019 and possibly similar levels in 2020. Inflation continues to be tame, with even speculation of COPOM cuts in 2H. Delgado be-lieved that, if the cyclical recovery continues, inflation could pick up, but would still likely stay below the target cap.
Looking forward to opportunities, Ivers described potential “asset sales” (formerly known as “pri-vatizations”) by states such as Sao Paulo and Minas Gerais. Vandersteel and Patel suggested that Brazil sovereign debt might be tighter than fundamentals warrant, though Patel added that EM is generally undervalued on long-term metrics. Delgado noted that the Chinese economic deceleration and a possible US recession in 2020 give him reason to avoid being over-bullish on Brazil, and his stance on the BRL was neutral. Panelists concurred that the US-China trade war stood as a key risk on all Brazil bets.
Speakers agreed on the important role of Finance Minister Guedes. Ivers expressed optimism that Guedes would persevere despite the potential for government fractionalization. “From the market perspective, Guedes is the anchor of the economic reform process, so, if he is out, as-sets will re-price,” counselled Delgado.