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Brazilians remain polarized following this past weekend’s inconclusive presidential election that pitted far-right incumbent President Jair Bolsonaro and the left’s superstar and former president, Luiz Inácio Lula da Silva (“Lula”) of the Partido dos Trabalhadores (Workers’ Party, PT).
While many analysts expect Lula to maintain the surprisingly narrow lead he garnered for the upcoming runoff vote, markets may remain rocky even under the assumption that a Lula win has largely been priced in. The risk also remains that Bolsonaro may reject the runoff outcome, claiming electoral fraud and issues with electronic voting machines.1,2
From an economic perspective, a victorious left could be a surprisingly positive outcome, and financial markets are partially reflecting this. The Brazilian real has recently held its ground against the US dollar while many developed market currencies, including the euro and the pound sterling, got battered. Brazilian equities have strongly outperformed emerging market peers year-to-date and over one year.3 While Lula embraces many left-wing PT signature policies like transfer payments and debt-forgiveness programs, neither the business community nor the wider populace view him as a socialist firebrand—despite Bolsonaro’s attempts to paint him as such. Occasionally radical on paper, Lula’s actual policies from 2003 to 2010 tended to be pragmatic. His time as president saw an average annual gross domestic product (GDP) growth of 4.5%, public debt-to-GDP reduced by about one-third, and roughly 20 million Brazilians climb out of poverty.4
Bolsonaro, of course, had his own successes in office, perhaps most notably a mammoth plan for long-term pension reform in 2019. This is widely regarded as a major step toward consolidating Brazil’s budget deficit, which ballooned in recent years largely due to exorbitant pension costs. Until 2030, the reform is expected to produce around 800 billion reais in savings (US$155 billion at today’s exchange rate).5 Nevertheless, currently more than 90% of the budget is still being spent on mandatory payments, making substantial progress unlikely in the short term—regardless of who wins the election. The next president will also have to deal with the prospect of a faltering world economy. On the other hand, Brazil is likely to continue to benefit from high commodity prices, although it also faces risks from an escalation of the war in Ukraine as it is highly dependent on fertilizer imports. It is important to note, however, that even as a leading commodities exporter, Brazil is somewhat insulated from global economic shocks. Trade accounts for just under one-third of GDP, while household consumption contributes over 60%.6
On balance, a Lula presidency could lead to a rising deficit over the short term, which may be offset in the medium term by higher tax revenues and more private consumption. Government investment in the expansion of renewables could also increase. While Brazil is already a leading nation in hydropower production, Lula’s platform includes pledges on transitioning state-run Petrobras to be more competitive against European firms.7 A PT victory could indeed help unleash Brazil’s enormous potential in green energies, especially in times of heightened geopolitical concerns over energy security.
We do, however, expect some further volatility, either because markets may have to reprice in the event of an unexpected Bolsonaro win in the runoff, or should Lula prevail, investors will be left to digest some post-election uncertainty and evaluate his actual policies versus campaign pledges. In both cases, however, investor opportunities abound as Brazil remains a leading player in both hard and soft commodities, with a head start in green energies, and a young and still growing workforce.
WHAT ARE THE RISKS?
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1. Source: Axios, “Brazil’s Bolsonaro echoes Trump’s election fraud claims,” July 26, 2022.
2. Source: Aljazeera, “Bolsonaro’s false fraud claims involve this Brazil voting system,” September 6, 2022.
3. Source: Bloomberg, 2022.
4. Source: The Economist, “How left-wing on economics is Luiz Inácio Lula da Silva?,” September 19, 2022.
5. Source: BBC, “Brazil pensions: Victory for Jair Bolsonaro as reform passes,” October 24, 2019.
6. Source: The Global Economy, “Brazil: Trade openness,” 2020.
7. Source: Argus Media, “Lula to reposition Petrobras for energy transition,” September 14, 2022.
