Brazil: Real surges on reform optimism
The Brazilian real strengthened notably at the start of 2019, bolstered by market optimism over the new government and reform prospects. On 11 January, the real ended the day at 3.71 per USD, 4.9% stronger than its value the same day in December. In addition, the real was up a notable 15.4% per USD from the same day last year. The real had a tumultuous second half of 2018, with large swings in value seen largely due to the noisy election cycle.
Market optimism over Jair Bolsonaro’s presidency has been the driving force behind the real’s recent strengthening, as hopes that reforms to tackle the country’s bloated fiscal deficit and the fiscally unsustainable pension system could finally materialize. Economic policy in Brazil ground to a near standstill over most of the past year due to the election cycle.
Bolsonaro campaigned on a market-friendly platform and his economic team is headed by the liberal and reform-oriented Paulo Guedes as economy minister, which has lit hope for bold measures to be implemented. That said, the new government needs to move quickly to keep up optimism and there is a risk that the administration does not live up to market expectations. Its ability to pass legislation through Brazil’s divided and fractured Congress is untested and Bolsonaro remains a controversial figure, which could hamper his ability to gel with Brazil’s traditional political parties. On top of this, some conflicting messages over upcoming policy have emerged from the government in recent days, generating uncertainty over the strength of reforms.
Looking ahead, the critical pension reform will be in the spotlight, which could be an upside or downside risk on market sentiment and consequently, the real. Overall, most of our panelists see the real weakening somewhat in the coming quarters, although remaining stronger than the lows seen in the run-up to the October election.