Brazil markets fall as Cabinet scandal shadows pension overhaul

By Jamie McGeever and Ricardo Brito

BRASILIA (Reuters) – Brazilian markets fell on Monday as investors feared a brewing political scandal could strain President Jair Bolsonaro’s coalition in Congress, hurting his ability to pass a pension overhaul seen as key to fiscal and economic recovery.

Bolsonaro is expected to fire one of his most senior aides, Secretary General Gustavo Bebianno, over accusations of misuse of campaign funds for congressional candidates in the October election.

Vice President Hamilton Mourao told reporters that Bolsonaro had decided Bebianno would have to go and that the decision on his exit and replacement could be announced later on Monday.

Bebianno, who helps coordinate government affairs and was acting president of Bolsonaro’s right-wing Social Liberal Party last year, denies any wrongdoing.

The scandal is souring investor sentiment, which had built up a positive head of steam last week after early details of Bolsonaro’s social security reform proposals were released. The full package will be presented to senior lawmakers on Wednesday.

Brazil’s Bovespa stock market fell more than 1 percent on Monday, the dollar rose almost 1 percent to just under 3.7400 reais and January 2020 interest rates rose more than 3 basis points to 6.41 percent.

“This political issue with Bebianno is quite negative, and could play a negative role for the discussions in Congress,” said Patricia Krause, economist at Coface in Sao Paulo.

“The most likely scenario is Congress approves social security reform. But this issue is certainly a downside risk. It’s a distraction, and it takes away the focus from the matter” of much-needed reform, she said.

With market liquidity thinner than usual on Monday owing to the U.S. Presidents Day holiday, local investors were left to focus on the domestic political turmoil. Some profit-taking from last week’s gains was the order of the day.

Last week, the Bovespa rose 2.3 percent, within touching distance of its record-high 98,588 points. Interest rates fell 15 basis points, the biggest weekly drop for two months, and the real rose as investors welcomed early details of Bolsonaro’s pension overhaul plans..

The Cabinet crisis got personal after one of Bolsonaro’s sons branded Bebianno a liar on Twitter, putting pressure on the president to dismiss his close aide just weeks into his term.

(Reporting by Jamie McGeever and Ricardo Brito; Editing by Tom Brown and Peter Cooney)