The country’s deepening polarization will hinder the approval of potential reform efforts
The weekend attack on the three branches of government will likely rekindle an unpredictability in Brazil’s operating environment that goes beyond economic risks. MNCs should expect a volatile trading session after Brasilia’s invasion, as the social unrest may add more short-term volatility to Brazilian assets and FX, especially the nation’s country risk assessment by foreign investors. Assets of all sectors should be affected, with a greater impact on industries more closely linked to the domestic conditions, such as retail, financial services, and construction companies. However, the political fallout of these protests will be muted—the chances of a reversal of the election results are incredibly slim—and Brazil’s ongoing risk for 2023 remains associated with its fiscal outlook.
Overview
On January 8, a week into President Luiz Inácio Lula da Silva’s (Lula’s) third term and months after the end of Brazil’s electoral process, social tensions boiled over as radical supporters of former President Jair Bolsonaro invaded the presidential palace, the Supreme Court, and Congress, calling for the imprisonment of President Lula, military intervention, and Bolsonaro’s return to power. After authorities reclaimed control over government offices, over 400 people were arrested between Sunday, January 8 and the morning of Monday, January 9. On Sunday evening, Supreme Court Justice Alexandre de Moraes suspended Brasília Governor Ibaneis Rocha from his office for 90 days, and Brasília’s security secretary, Anderson Torres, was fired. Following the containment of the riots, President Lula declared a federal intervention in Brasilia, where the federal government will take over public safety responsibilities until January 31. In practice, the current executive secretary of the Ministry of Justice, Ricardo Garcia Cappelli, will replace Torres, the dismissed security secretary. Congress is expected to convene an extraordinary session to vote on the decree and make the measure official no later than January 10.
Our View
While the social unrest of the past weekend certainly fuels short-term uncertainty about the stability of Brazil’s democracy, there is minimal risk to the country’s already-established transition of power. While there are parallels between what transpired this weekend and the events that happened in Washington, DC, two years ago, there are also notable differences. First, whereas in Washington the police were taken by surprise and overwhelmed, in Brasilia, authorities were criticized for failing to prevent the unrest. Second, as the presidential transition and inauguration had already been finalized in Brazil, the risks to democratic continuity were, while undeniably credible, smaller than those experienced by the US government. Additionally, the positioning of former heads of state were different in each context. In Washington, the invaders were instigated by then-President Donald Trump, who was looking to reverse his defeat after his Democratic opponent received the support of 7 million more voters and 74 more Electoral College votes. Then-president Trump would only plea for his supporters to concede about an hour after the invasion. In the case of Brazil, while former President Bolsonaro contributed to election fraud fears, his dispute of the election results and his direct involvement with the riot events was rather limited, signaling smaller institutional involvement and political support behind the capital’s invasion. Ultimately, the political turmoil will perpetuate the high levels of polarization present in Brazil’s social fabric and hinder the approval of wide-sweeping reform in the country’s divided Congress.
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