By Jamie McGeever
BRASILIA (Reuters) – Brazilian President Jair Bolsonaro’s decision to replace the head of state-run oil giant Petrobras threatens the government’s privatization program and potentially the economy’s medium-term growth prospects, ratings agency Moody’s warned on Wednesday.
“The greatest risk to Brazil’s sovereign credit profile is a confidence shock that leads to a sharp increase in risk premia. President Jair Bolsonaro’s action increases political noise and uncertainty over structural reforms this year,” Moody’s sovereign analysts team led by Samar Maziad wrote in a note.
Bolsonaro’s shock move after a spat with the outgoing chief executive over fuel price hikes prompted investors to dump Brazil’s currency and stocks, while pushing up interest rates. Some 100 billion reais ($18 bln) was wiped off the value of Petroleo Brasileiro SA over Friday and Monday.
Markets recovered Tuesday and Wednesday, but sentiment remains fragile.
“The negative market reaction to this decision sends a clear signal that reversing course on broader reforms could have meaningfully negative implications for fiscal dynamics if interest rates were to increase ahead of the economic recovery or risk premia were to sharply rise,” Moody’s said.
Bolsonaro went into damage limitation mode on Tuesday, delivering to Congress a provisional measure associated with his government’s plans to privatize state-run electricity provider Eletrobras,.
“Our privatization agenda is going full steam ahead,” he said.
Brazil’s economy is likely to shrink in the first quarter due to the second wave of the COVID-19 pandemic and end to government income transfers to the poor at the end of last year, a growing number of economists say.
But the central bank is set to raise interest rates sooner rather than later, perhaps as early as next month, against a backdrop of sticky inflation and intensifying worries over the government’s fiscal position.
Moody’s has a sub-investment grade Ba2 rating on Brazil’s sovereign credit, with a stable outlook.
(Reporting by Jamie McGeever; Editing by Marguerita Choy)
