Brazil’s Unrest: Should Investors Worry?

http://blogs.ft.com/beyond-brics/2013/06/19/brazils-unrest-should-investors-worry/#ixzz2WqmHIlTT Jun 19, 2013 4:11pm by Jonathan Wheatley The scenes have been extraordinary. Not only the size of public demonstrations in Brazil’s major cities over the past week but also the violence with which they were met by supposedly elite police units have made for surprising and shocking viewing. Are investors worried? And should they be? The short answer to the first question is, apparently, No. To be sure, Brazilian stocks have had a rough ride lately but equity investors are far more worried about the US Federal Reserve than they are about protesters, and the Bovespa index has been heading south since long before they took to the streets. The same is true of the currency and other assets. Beyondbrics has not seen a single analyst make any connection between the demonstrations and asset prices (we would be more than interested to be advised otherwise). To the second question, though, the answer must surely be, Yes. “What is going on is the result of slow growth and that is unlikely to go away,” says Alfredo Behrens, a professor of management at FIA, a business school in São Paulo. Which about sums it up. As one articulate young video blogger puts it, this month’s protests are about more than the 20 centavo increase in bus and metro fares that initially sparked them: “If everything was working, health, education, public transport itself,” she says, “nobody would be on the streets demonstrating.” Parallels have been drawn with the recent protests in Turkey (indeed, protesters in São Paulo and Istanbul saluted each other). Other parallels could be drawn with recent demonstrations in Chile, and even with the upper middle class protesters of Moscow and Chinese micro-bloggers. In all cases, newly economically-enfranchised people, the much-cited new middle classes, are looking about and finding themselves dissatisfied, often because their taxes are not being properly spent. They may feel their freedoms are being curtailed in other ways, too, but common among them is a sense of getting the bad side of a bargain with the state. Many have been quick to point out that Brazil’s protesters may be more privileged than the newly-enfranchised “classe C”. As newspaper Folha de S.Paulo noted on Wednesday, three quarters of the demonstrators have university degrees and more than half are aged under 25. But to dismiss them as a bunch of upper crust urbanites with nothing better to do would be a serious mistake. The educated young have led big revolutions in Brazil in the past (and around the world). And the first thing on the shopping lists of many joining the classe C has been a university eduction for their children. Why should investors worry? One threat to their interests is that the government may react in an overly placatory manner. Reversing the increase in transport fares would be fiscally irresponsible. (Doing what some protesters demand and making public transport free would be fiscal suicide.) The government may be doubly tempted to damp down the protests with floods of cash by the fact that next year is election year – and voter support for President Dilma Rousseff, until recently seen as a shoo-in for re-election, has slipped severely in recent weeks. Another threat is that the government may simply ignore the protests, assuming they calm down over time. That would leave Brazil stuck in its low-growth rut. This may no longer be as appealing to policy-makers as it once was. Slow growth of around 2.5 per cent is probably enough to keep unemployment at a level acceptable for voters. But voters are getting upset all the same. Ideally, of course, the government will listen to the voices from the streets and take energetic action to fight corruption and inefficiency in the public service. On the evidence of recent performance, the chances of that are slim. Even the leading Brazilian politicians who were convicted last year for corruption in a landmark case have yet to actually do any time. Taylor Scott International