EMTA SPECIAL SEMINAR: BRAZIL: BOLSONARO'S FIRST 100 DAYS
Thursday, January 10, 2019
ISDA Conference Center
10 East 53rd Street (at Fifth Avenue), 8th Floor
New York City
3:30 p.m. Registration
4:00 p.m. Panel Discussion
Daniel Cunha (XP Securities) - Moderator
Roberto Secemski (Barclays)
Kevin Ivers (DCI Group)
Carla Buffulin (EMSO)
Matthew C. Duda (PGIM Fixed Income)
5:00 p.m.
Cocktail Reception
Registration fee for EMTA Members US$95 / US$695 for Non-members.
Additional Support Provided by Barclays and XP Securities.
We regret this event is not open to the media.
EMTA NYC Panelists Hopeful for Brazilian Pension Reform Prospects
The prospects for Brazil under President Bolsonaro were debated at an EMTA Special Seminar held in New York City on Thursday, January 10, 2019. The event drew a standing-room-only crowd of 150, and was sponsored by Barclays and XP Investments.
In opening remarks, XP’s Daniel Cunha likened Brazil’s past few months to the ascent of a mountain. “Yes, we have reason to celebrate getting to the top, but now starts the downclimb, and how can we avoid accidents or pitfalls?”
Roberto Secemski (Barclays) expressed a constructive stance. He cautioned, however, that while the much-discussed pension reform is “necessary, it alone is insufficient; it’s just the first step” in restoring the country’s economic health. The appointment of a cabinet that is largely without political affiliation is in line with Bolsonaro’s promise of a new approach. “Unknowns” worthy of investor focus are the extent of the president’s support of the new economic team, Bolsonaro’s relations with congress, and what coalitions will form.
Kevin Ivers of DCI Group provided a political overview. “The country was ready for a major change, and while Bolsonaro didn’t create the wave, he surfed it,” he stated. Thus, many officials owe their success to the wave, rather than to Bolsonaro personally. Middle-class supporters of the president voted for change, and they, “will not be patient; they live month-to-month and will feel a big impact from any minor change in the economy.” To retain their support, the president will need to transform their aspirations into reality. The new congress’ leaders will determine whether the president can carry out reforms, and if Calheiros returns as senate president, Bolsonaro’s job will become more difficult.
During a recent trip to Brazil, Carla Buffulin (EMSO) observed a palpable optimism, and she believed the construction, retail and consumer product sector should benefit. The rally in Brazilian assets has thus far been largely confined to sovereign debt and FX, while corporates have lagged. Buffulin ventured that equities could return up to 15% with the passage of a partial pension reform bill, and as much as 35% under a full reform law. Buffulin argued the case for Brazilian corporates on a relative value basis, seeing more upside vs. their counterparts in Argentina, Russia, Ukraine or “the super-tight GCC.” She estimated a 50% probability that pension reform would be advanced in the 1H of 2019.
“I want to believe in the story,” confessed Matthew Duda (PGIM Fixed Income), who maintained an overweight in Brazilian dollar bonds. Duda stressed the complexities of Brazilian politics, while assessing that much of the potential progress has already been priced in relative to several other Latin American credits. He believed that the BCB was more likely to maintain current rates, if not hike, a stance he acknowledged was a contrarian view.
On growth, Barclays had recently revised its forecast to 2.5% (from 2%, which Secemski agreed had been below consensus). The recovery would be gradual and not V-shaped. The new 2.5% forecast was based on assumptions that include the passage of a pension reform bill similar to the previous Temer proposal. Duda announced his growth estimate at a more conservative 2.3%.
As for privatizations, Ivers noted that states such as Sao Paulo and Minas Gerais had elected “change” governors, meaning some state-owned firms could be put on the block. Buffulin underscored a change in the lexicon, and that officials have taken to employing new terminology such as “sales of assets” in order to avoid using the word “privatization.”
Buffulin was encouraged by the country’s new economic team. She added, however, that execution—and the defection of key players—remained a risk. On the other hand, Justice Minister Moro was “in it for the long term,” according to Ivers. His appointment was well-received in Brazil, and any progress he can make to increase “ordem” in Brazil would be “blockbuster.”
Ivers reminded attendees that congressional leaders are powerful and can obstruct legislation, or can extract concessions. This posed a risk for Bolsonaro, and in fact could be “a disaster.” On the other hand, Cunha argued that even Calheiros would be “open to discussion,” as he is a classic political operative. He added that, despite Bolsonaro’s previous denunciation of the Temer proposal on pension reform, his own eventual proposal may incorporate much of the Temer bill.