Brazil Markets Cheer JBS Plea Deal Review as Temer Gets Respite

  • Currency nears strongest level since May on political outlook
  • Itau cuts JBS price target, sees 30% downside to shares

Brazilian markets jumped on the news that the plea deal that sparked a political crisis earlier this year could be scrapped, clearing the path for President Michel Temer government’s to push ahead with efforts to shore up the economy.

The benchmark stock gauge rose as much as 1.5 percent, putting it among the top global performers, and the currency climbed 0.6 percent toward a level it hasn’t breached since May. Investors say the decision to review the plea bargain weakens the position of the prosecutor general, who had indicated he planned to present new charges against Temer this month.

His office said Monday that it may revoke benefits granted to three executives from J&F Investimentos SA, the holding company that controls assets of the billionaire Batista family including meat giant JBS SA, because of possible omissions from their testimony. Prosecutor General Rodrigo Janot told journalists that new audio of conversation between Joesley Batista and another executive had surfaced Thursday and required clarification.

The tape, which appeared to have been recorded accidentally, suggested "illicit acts" may have been carried out at the chief prosecutor’s office and the Supreme Court, Janot said, while declining to provide further details. J&F issued a statement saying that the new audio will be "swiftly clarified" and will show the "good faith" of the executives.

Political Cost

“The new chapter of the JBS soap opera is a twist, and the market is reacting positively," said Cristiano Oliveira, the chief economist at Banco Fibra. He also said markets are responding to economic news including better-than-forecast industrial production figures as well as estimates for faster growth.

The Ibovespa equity gauge added 0.8 percent as of 10:30 a.m. in New York, with the real gaining 0.7 percent to 3.1189 per dollar.

The investigations into the plea deal, which drew public ire due to the lenient terms granted to the executives in exchange for testimony in which they say they gave bribes to more than 1,800 politicians including Temer, will likely hinder Janot’s plans to formally charge the president a second time.

Any charges would have weakened his political capital, needed to push the government’s ambitious reform agenda, which was thrown into disarray in May by the JBS plea deal. The plans include reining in a huge budget deficit, privatizing dozens of state-run enterprises and overhauling Brazil’s pension system.

With the plea bargain being questioned by prosecutors themselves, the political cost for Temer is significantly reduced, XP Investimentos’s political analyst Richard Back said in an interview. Eurasia’s Christopher Garman said the scenario in which the government is held hostage by the charges and Congress stalls is less likely now.

JBS assets, meanwhile, slumped. Bonds due 2024 fell 1.8 cents to 98.8 cents on the dollar, while shares plunged 5.5 percent to 8.11 reais. Itau BBA slashed its target price for the shares to 6 reais from 16 reais, saying a cancellation of the plea bargain would jeopardize the company’s moves to stabilize debt and normalize operations since May.

— With assistance by Bruce Douglas, Gabriel Shinohara, Josue Leonel, and Davison Santana

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