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Shock waves across Latin America

Matein Khalid
Investor | Family Office CIO | Portfolio Strategist | Board Advisor | VC | Finance Professor

Brazil will elect its next president on Sunday. This election will send shock waves across Latin America and the global markets because if President Bolsonaro wins, all bets are off for the Amazon rainforest and any credible hope to win the battle against climate change. Bolsonaro has accused his opponent Lula, a former head of state who also spent almost two years in prison on suspected corruption charges of being a Satanist. Lula was forced to deny with a straight face that he has regular conversations with the Devil on national TV. Bolsonaro’s political base lies in the evangelical movement that has swept Brazil and rivals the Catholic Church in numbers as well as the military high command, who’s 1964-1985 juntas he has praised for their extensive use of torture.

Bolsonaro is also backed by Brazil’s agribusiness barons, who control 27% of the GDP even though 30 million poor people in the country live with food insecurity. Bolsonaro, a passionate admirer of Donald Trump and Putin’s Russia, so mismanaged the COVID pandemic that tens of thousands of citizens died needlessly due to his ignorant view on masks. Bolsonaro, like all neofascist populous nutcases, has ridiculed climate change even as Amazon deforestation increased by 75% during his 4 years in power. In contrast, Lula is the champion of the rainforest and has embraced the net zero pledge but wants most state intervention in the economy.

Brazil’s economy faces serious macro and social challenges, no matter who wins. GDP growth was a mere 0.15% in the past decade and has still not recovered from its worst economic slump since the Great Depression. GDP per capita is still 10% below its level a decade ago and an agribusiness empire that can feed a billion people worldwide can still not eradicate hunger in the shantytowns of São Paulo and the favelas of Rio. Inflation is 9% and Brazil’s growth rate will be hit hard by recession in China, US and Europe. Lula’s dented center-left coalition could plunge Brazil even deeper in a fiscal black hole. Despite the political risk of a bitter election, I still believe there are some fabulous investment opportunities in Brazilian equities/debt. Economy minister Paolo Guedes is an alum of Dr. Milton Friedman’s Chicago School. He has privatized Eletrobrass, attracted FDI and reformed the Byzantine tax code/pension system. It is imperative that Lula appoint a credible pro-reform Finance Minister to present Brazil’s case to Wall Street and the IMF.

A Lula win will make it certain that the EU will slash tariffs on $30 billion of Brazilian exports since France had made it all too clear that this will not happen without protection of the rainforest. The Bovespa trades at 7X forward earnings, a huge discount to its 10 to 11X valuation metrics in the past decade. The central bank in Brasilia increased the Selic rate from 2% in early 2021 to 13.75% now. The land of samba is also the land of moolah since the Brazil real has risen 7% against King Dollar in 2022.


Also published on Medium.



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