Region - Gasoline prices and political risk
Bolsonaro fired the head of Petrobras. That may be a sign of things to come.
Oil prices are up. Food prices are up. Theoretically, this should be great news for countries that rely on commodity exports for income. In reality, it’s terrible news for many countries in Latin America including the commodity exporters.
The same countries that make money on selling commodities also face political pressures from citizens who are upset about rising food and gasoline prices. Citizens get angry when food prices increase in a country that produces far more food than it uses. Nobody wants to see gasoline prices rise, but especially citizens who live in places where oil comes out of the ground.
This was true in normal pre-pandemic times. In 2019, fuel price subsidy cuts requested by the IMF led to weeks of protests in Ecuador that briefly forced President Moreno to move the seat of government out of Quito.
Now, most of the region has been through a major recession. Unemployment, poverty and hunger have increased. The effects of a commodity inflation post-recession are going to be magnified. Many citizens will experience it as a type of stagflation, even if it doesn’t meet the technical definition.
This is an economic environment where populists who are out of government thrive. Every politician in power has been dealt a difficult hand by the pandemic. Many have already spent big to help the economy rebound and they have limited room to maneuver to support populations hit by price increases. Subsidies become much more expensive when commodity prices rise. Populists will turn citizens against any governments, even if the economic bad news is largely outside the government’s control. Any government that tries to cut subsidies faces a risk of popular blowback.
But what about the populists who are in government?
They’ll try to find someone else to blame.
Price freezes!
The conversation this week is all about Brazil. In response to rising fuel prices and protests by truckers, Jair Bolsonaro fired the head of Petrobras and put a former military officer in charge of the company. This was exactly the type of populist and interventionist move that Bolsonaro has supported for much of his career. The Paulo Guedes push to move the government towards free market ideology took a giant step backwards.
Will Bolsonaro make additional interventionist moves in the economy? Absolutely if it helps him politically. I think most analysts have long understood that Brazil’s president is a populist, not a free market ideologue. This week we got to see the results of that in practice.
I wrote a newsletter in early February that mentioned the Fernandez government in Argentina threatening and implementing new policies in response to rising food prices. If high gasoline prices continue for the coming weeks, Bolsonaro is likely just the first president of several to respond to this new reality with interventionist policies. In particular, Mexico’s social media is full of people criticizing the rising prices of fuel given AMLO’s focus on energy issues. This is a moment to keep an eye on gasoline prices and how governments and oppositions respond.
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