Insight Article Desktop Banner
Tales From the Emerging World
April 07, 2021

Brazil: Populism versus Commodities

Insight Video Mobile Banner
April 07, 2021

Brazil: Populism versus Commodities

Tales From the Emerging World

Brazil: Populism versus Commodities

Share Icon

April 07, 2021


At a time when many investors are rediscovering emerging markets, Brazil stands poised to capitalize on two global trends that could help sustain that comeback: the overlooked wave of economic reform, and the nascent revival in commodity prices. The benefits, however, may have to await the outcome of a period of uncertainty, as President Jair Bolsonaro waffles on economic reform. The result is a strange disconnect, as doubts about reform prevent Brazil from capitalizing on the rise in prices for its main raw material exports.


For decades Brazil’s fortunes have been closely tied to global commodity prices. Its per capita income was closely correlated with the global commodity indexes.1 So was the value of the real, and of Brazilian stocks. But starting last year, those links started to break, and Brazil stopped behaving like the classic commodity economy that it is. Commodity prices started to rise in earnest, but Brazil did not. Another odd departure in a surreal year for the global markets.

DISPLAY 1 The Real Rose and Fell With Commodity Prices … Until Last Year

Source: Commodity prices based on CRB Index, MSIM, Bloomberg, Factset, Haver.


The main reason is politics. Bolsonaro is a right wing populist with a taste for free market reform, and his two sides are constantly at war. Since he came to power in 2019, markets have been obsessed with every twist and turn in Bolsonaro’s efforts to reform what is arguably the most oversized and overregulated welfare state in the emerging world. Lately, signs of populist backtracking have fed fears that Bolsonaro will run up the public debt, fueling inflation and leading to a classic Latin American meltdown.

Those concerns can’t be ignored. And as they persist, Brazil is missing out on what looks like the start of a commodity revival: after a weak decade for commodity prices, global supply and demand dynamics point to a strong one ahead. But we think investors are too focused on one part of the political story — the populist side of Bolsonaro — and too little on commodities, which have typically mattered more in the long run.

Even the political news is not all bad. Once the pandemic hit last year, Bolsonaro’s effort to downsize the government and its welfare and pension systems took a back seat to relieving financial distress. Brazil rolled out a relatively generous stimulus package compared to other emerging nations, driving its public debt up from 75 percent to just under 90 percent of gross domestic product (GDP).2 Worries that the fiscal situation could deteriorate further are weighing on the real.

The sense that reform is on hold is based largely on Bolsonaro’s February decision to fire the CEO of Petrobras after he tried to raise fuel prices to market rates. That was widely seen as a populist sop to protesting truck drivers. But much of what Bolsonaro has done reflects his reform side.

Last year investors worried that the central bank would come under pressure to start buying government debt, which would further undermine the real. Instead Bolsonaro signed a law ensuring central bank independence from political interference. Last month, the central bank surprised everyone by pushing through its sharpest hike in more than a decade.3 Short term rates are still negative in real terms, too low to stanch inflation. But fear that populism would destroy monetary discipline has not played out.

On paper, the fiscal reform agenda is still reasonably strong. Bolsonaro’s party recently pushed through a law designed to restrain public spending — including spending for the popular Bolsa Familia welfare program — when it reaches certain trigger points. In the works for the first half of 2021; plans to rationalize a grab bag of state and federal taxes into one value added tax, privatize the big state utility, and restrain civil servant salaries.4

Doubters say these measures have been in the works for several years, and action is urgent. Their concerns grew with the recent news that the disgraced former president Luiz Inacio Lula da Silva may be clear to run again in 2022, and return his big-spending Workers’ Party to power.

A recent forecast suggests that, even if the government complies with the new spending caps, public debt will remain above 90 percent of GDP for most of the coming decade.5 At the same time Brazil’s ability to pay that debt is declining. The unexpected combination of rising commodity prices and a weakening real is pushing up inflation. Since last year’s lows, inflation has more than doubled for consumer prices to more than 5 percent, and nearly quadrupled for food prices to 19 percent.6

The result is upward pressure on interest rates. Bond yields have already risen to slightly above 8 percent.7 In short, Brazil needs to accelerate not delay fiscal reform, in order to bring down the debt-GDP ratio more quickly.

Inspiration could come from the accelerating vaccination program. Brazil is one of the few emerging markets that has seen a recent increase in cases and deaths, and its vaccine rollout had been underwhelming until late last month. Brazil nearly doubled the number of doses it delivers each day to more than 600,000, with an aim of 1 million.8 At that rate, two thirds of the population could be vaccinated by the end of 2021.9

Herd immunity could do wonders for the economy, and the president. The recovery that began last year could pick up sharply if the vaccination program slows the pandemic in the second half this year. The current consensus forecast is for 3.5 percent growth in 2021, up from a 4.1 percent contraction for 2020.10 And if the economy gains pace, Bolsonaro could gain the support and confidence he needs to push fiscal reform and get re-elected.

Following up with deeper fiscal reform would have several beneficial effects, starting with the currency. Based on our model for how commodity prices normally impact the Brazilian currency, the real should be about 30 percent stronger than it is today, against the U.S. dollar.7

Right now, Brazil’s progress is being distorted by the impact of the pandemic and inflation on Bolsonaro, who’s declining popularity is pushing him to indulge in fitful displays of populism. It may take another election, and herd immunity, to put reform back on a consistent track. That should be enough to a restore a sense of normalcy, with Brazil, a classic commodity economy, benefiting from the commodity price boom.



There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio.  Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. Stocks of small-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the Portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.


1. MSIM, Bloomberg, Factset, Haver. As of March 2021.
2. MSIM, Haver, IMF. As of December 2020
3. Bloomberg. As of March 2021.
4. Eurasia Group. As of March 2021.
5. UBS. As of March 2021.
6. MSIM, Bloomberg, Factset, Haver, UBS. As of March 2021.
7. MSIM, Bloomberg, Factset, Haver. As of March 2021.
8. Itau. As of March 2021.
9. Itau, JP Morgan. As of March 2021.
10. Bloomberg. As of March 2021.

Chief Global Strategist
Emerging Markets Equity Team

Select Product(s)

Right Click Edit


Gross Domestic Product (GDP)
is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. It includes all private and public consumption, government outlays, investments and net exports.

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific MSIM product.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

The information herein is a general communications which is not impartial and has been prepared solely for information and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Past performance is no guarantee of future results.

This communication is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

Ireland: MSIM Fund Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. Registered in Ireland as a private company limited by shares under company number 616661. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: MSIM Fund Management (Ireland) Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: MSIM Fund Management (Ireland) Limited, Milan Branch (Sede Secondaria di Milano) is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 11488280964. The Netherlands: MSIM Fund Management (Ireland) Limited, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. France: MSIM Fund Management (Ireland) Limited, Paris Branch is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Paris Branch with seat at 61 rue de Monceau 75008 Paris, France, is registered in France with company number 890 071 863 RCS. Spain: MSIM Fund Management (Ireland) Limited, Sucursal en España is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited, Sucursal en España with seat in Calle Serrano 55, 28006, Madrid, Spain, is registered in Spain with tax identification number W0058820B. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0)44 588 1074.

U.S.: A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain   a prospectus please download one at or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.


Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This publication should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore ("SFA"), (ii) to a "relevant person" (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. In particular, for investment funds that are not authorized or recognized by the MAS, units in such funds are not allowed to be offered to the retail public; any written material issued to persons as aforementioned in connection with an offer is not a prospectus as defined in the SFA and, accordingly, statutory liability under the SFA in relation to the content of prospectuses does not apply, and investors should consider carefully whether the investment is suitable for them. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

Japan: For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland.

Charts and graphs provided herein are for illustrative purposes only.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable European or Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this document is appropriate for any person to whom they provide this document in view of that person’s circumstances and purpose. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary.

The whole or any part of this work may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent. This work may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law.

All information contained herein is proprietary and is protected under copyright law.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.


This is a Marketing Communication.

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.