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Brazil Politics October 2018

Brazil: Bolsonaro secures larger-than-expected victory in first round but uncertainty still lingers

Right-wing congressmen and former army captain, Jair Bolsonaro, won a larger than expected victory in the 7 October presidential elections, although failed to capture Brazil’s top job in the first round. Preliminary results revealed that Bolsonaro secured 46.0% of the vote, notably higher than earlier opinion polls suggested but still below the 50% threshold needed to win the presidency outright. Bolsonaro will now face left-wing Workers’ Party candidate Fernando Haddad, who won 29.3% of the vote, in a run-off election on 28 October. While the result suggests that Bolsonaro is poised to bag the presidency, there is still some uncertainty over how votes from the remaining candidates will play out and the second-round vote could be close. Meanwhile, the market reaction to Bolsonaro’s victory was positive with the real and Brazil’s main stock index rising on 8 October. Bolsonaro pledged tougher fiscal reforms than Haddad and is seen as the more market-friendly candidate of the two. Nevertheless, the economic implications of the vote remain murky given the close race and difficulty to pass legislation in Brazil’s gridlocked Congress.

Looking at the contenders in more detail, Bolsonaro has resonated with his voters due his tough stance on crime and his outsider status as corruption scandals have engulfed Brazil’s traditional political elite. He is a polarizing figure, who has made many extreme and controversial speeches, and was unable to campaign on the road after being near-fatally attacked at a rally in September. On the economic front, he has promised to press forward with economic reforms, including overhauling the bloated pension system, which would bode well for the sustainability of the country’s recovery. However, his wildcard status is creating some uncertainty over his future policy and, given his extreme views, there are serious doubts over his ability to garner sufficient support to navigate Brazil’s divided Congress. In simultaneous legislative elections, his Social Liberal Party (Partido Social Liberal, PSL) won 51 out of 513 seats in the Chamber of Deputies, illustrating the need for consensus-building to pass legislation. That said, the better-than-expected outturn for Bolsonaro should boost his political capital, at least for now.

In contrast, Haddad has been looked upon warily by market analysts, who largely blame his Workers’ Party for Brazil’s economic distress of recent years. The Workers’ Party failed to correct government financial woes during the economy’s boom years and Haddad has pledged to use government spending to stoke the economy, a move which could worsen the country’s already weighty fiscal deficit. In addition, Haddad also stated that he would roll-back some of the reforms implemented over the past two years, including the spending cap which has been credited with helping tame government spending. That said, some analysts believe that Haddad, along with Bolsonaro, could move more to the center in the upcoming weeks, as they seek to capitalize on middle-ground voters whose candidates did not make it into the runoff.

While the resounding victory for Bolsonaro paints a clearer picture than before the vote, political uncertainty still hangs over Brazil’s outlook. Political events could continue to spark volatility in the real as the final campaigning wraps up. A president who is willing to prioritize economic reforms and has the necessary muscle to force through their agenda is crucial for improving the sustainability of government finances and shoring up the recovery’s longevity; however, this will only be seen once the new administration takes power. Taking stock following the first round, Joao Pedro Ribeiro and Mario Castor, analysts from Nomura, elaborate:

“In the near term, a (relatively) market-friendly election scenario tends to also suggest contained upside risks to both USD/BRL and inflation expectations. In this situation, we believe the BCB would be more likely to leave policy rates unchanged this year and into 2019. […]

In broader terms, we also see potential upside to our 2.0% y-o-y 2019 GDP growth forecast in a post-election scenario marked by less market risk/more favorable financial conditions. A more structurally-improved outlook, however, is still very much dependent upon the prospects of fiscal reform in 2019 – and it seems neither candidate has offered much detail on that front yet.”    

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