What does Bolsonaro's presidential win mean for Brazil's economic outlook?

Jair Bolsonaro will take the reins of Brazil’s economy on 1 January, after winning 55% of the vote in the second-round of the presidential election held on 28 October. The congressman and former army captain beat Workers’ Party candidate Fernando Haddad and will be the country’s first right-wing president in almost 15 years. Markets reacted positively to the news, with the Bovespa stock index hitting a record high and the real strengthening the day after the election. With election uncertainty finally lifted from the shoulders of Latin America’s largest economy, FocusEconomics asked some of our panelists to comment on what a Bolsonaro presidency means for their economic forecasts.  

“We have made marginal changes in our forecasts for 2019 with the victory of Bolsonaro. His first signals suggest he is willing to appropriately address the fiscal problem and indebtedness ratio by leading Pension Reform, privatizing and shrinking the size of the Federal government’s structure. The profile of the team tends to be characterized by discipline, planning and productivity. It seems likely he will strengthen regulatory agencies, which will improve the business environment and will encourage participation from the private sector. We remain optimistic about the prospective scenario for Brazil in 2019, with GDP growing 3%, BRL strengthening further against the USD, IPCA below target level and Selic rate unchanged at 6.5% p.a.” - Helcio S. Takeda, managing director and head of research at Pezco

“We developed a new scenario, with marginal changes in the forecasts. Certainly, if Fernando Haddad had won the elections, the projections would change dramatically. In general, we don’t expect a change in a direction of macroeconomic policy, with a focus on the fiscal balance, pension system reform and less government intervention in the economy. It means a good economic liberal orientation. But we have doubts about the political ability of the new government to make the economic agenda possible. In principle, the new government will have majority support in Congress, but the leaders (including the new president) weren’t tested in this position, to convince its support base to vote on hard topics.

Next year we expect GDP growth of 2%, but it’s essential to approve the pension system reform during the year, to sustain the higher levels of confidence and the prices of Brazilian assets. It’s a period of high uncertainty. If the agenda is implemented, it’s viable to obtain good results (probably better than estimated). But there are many challenges (including the international scenario) and the inexperience of the new government could be a problem. Finally, it’s important to recognize the structural advances made by the Temer government in the economic area, which have to generate good results in the next few years.” - Silvio Campos, senior economist at Tendencias Consultoria Integrada

“Our macroeconomic scenario already assumed the victory of a reformist candidate and, considering the candidates that went to the second round run-off, Mr. Bolsonaro was considered by the market as the one with a more market-friendly approach. The main reason for this relies mostly on the profile of Mr. Paulo Guedes, who was the main economic advisor during Mr. Bolsonaro’s presidential campaign and who will be the new Economy Minister. Mr. Bolsonaro administration will focus on tackling the fiscal imbalance, reducing the role of the government in the economy, promote some openness of the economy and keeping the pillars of the current economic policy.

Assuming that his government might succeed somewhat in those directions, we don’t change our outlook for 2019, in which we expect GDP growth rate at 2.5%, CPI inflation at 4.25% (thus meeting the target), selic rate ending up next year at 8% (tightening cycle during the 1st half in the wake of stronger GDP growth and therefore no need to keep monetary stimulus) and USDBRL ending up 2019 at 3.85. Of course, this scenario might change (for worse or for better) depending on the pace and contents of the structural reforms, as well as on other aspects such as privatizations/concessions, trade agreements with other economies, and so on.” - Economic research department, Banco MUFG Brasil

“[Bolsonaro’s victory has not yet affect our projections], as our forecasts were made before the second election round, but it probably will. If the new administration is able to push forward the proposals that were anticipated during the campaign – namely, social security reform, reducing fiscal deficits through expenditure cuts, Central Bank independence, privatization of SOE’s and trade liberalization – confidence should increase significantly and, given the still relatively large output gap, demand and growth should rebound more vigorously than anticipated in the short term. The outlook for 2019 should therefore improve.” - Leonardo Mello de Carvalho, economist at Datalynk

“We are maintaining our forecasts on Brazil. Bolsonaro's victory was not a big surprise. Our main assumptions for economic policies going forward remain untouched. We still expect pragmatic, orthodox policies, but still see the approval of significant economic reforms (such as an ambitious social security reform) as unlikely.” - Enestor Dos Santos, principal economist for Latin America at BBVA Research

“Forecasts for economic performance are little changed. We don’t expect a surge in capital formation in the short run and capacity utilization should increase at a slow pace. In the short run, we have adopted assets process more benign scenario, given global risks. Exchange rate at moderate highs, interest rates stable.  But there are some difficult themes, due to government political fragility and lack of experience, besides general dissatisfaction. Fiscal issues are not comfortable, on the other hand.” - José Francisco de Lima Gonçalves, chief economist at Banco Fator

After exiting the worst recession in the country’s modern history in 2017, a strong recovery has still not taken hold, with activity plagued by high unemployment, low confidence, a less supportive global backdrop and a tough political atmosphere. The implementation of crucial economic reforms and the reduction of political noise will be key to shoring up the economy’s momentum, which several of our panelists expect next year. Overall, the Consensus is for growth to strengthen from an expected 1.5% in 2018 to 2.3% in 2019, which is unchanged from last month’s forecast. The economy is seen growing 2.5% in 2020.

Author: Angela Bouzanis, Senior Economist

Date: November 8, 2018