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Brazil Politics November 2018

Brazil: Bolsonaro wins presidency; questions linger over reform details

Jair Bolsonaro will take the reins of Latin America’s largest economy on 1 January, after winning 55% of the vote in the second-round presidential election held on 28 October. The congressmen 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. Bolsonaro was considered the more market-friendly candidate in the run-off, promising to continue with fiscal consolidation and reform momentum, and his victory could bode well for the economy going forward. That said, uncertainty still lingers: He is a controversial and polarizing figure, which could hamper policy making, and the full details of his reform agenda are outstanding.

Bolsonaro’s pledges to speed up privatizations, implement pension reform and rein in government spending should help correct depleted government coffers and shore up confidence in the economy. Spearheading the new government’s economic and fiscal policy, Paulo Guedes will take the critical position of finance minister. Guedes is a liberal economist, who is likely to champion tax- and spending-cuts when in office. Such tax cuts could be risky given the hefty fiscal deficit, while a large degree of uncertainty still hangs over the incoming government’s plans given that hard details are outstanding. Moreover, Bolsonaro will have to navigate a divided Congress to pass legislation and his reform efforts could become gridlocked. While market-friendly parties gained ground in the Senate in October’s legislative elections, Bolsonaro is a controversial and polarizing figure which could hurt his ability to pass legislation. Bolsonaro is also viewed as a bit of a wildcard politician, with an erratic voting record in office, adding some uncertainty to his how his economic policy will evolve in the coming years.

After exiting the worst recession in the country’s modern history in 2017, a strong recovery has still not taken hold, and the economy is plagued by high unemployment, low confidence, a less supportive global backdrop and a toxic political atmosphere. The implementation of crucial economic reforms and the reduction of political noise will be key to shoring up the economy’s momentum. Although these will only become apparent next year when the administration takes power and reforms are unveiled, Bolsonaro’s campaign pledges send a positive signal that he will continue with reforms and that market-friendly policies will largely remain in place.

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