What the Brazilian Elections Means for Investors

By Nathan Chaudoin - October 29, 2018

The people have spoken: Jair Bolsonaro was elected the new president of Brazil Oct. 28. After receiving the most votes among more than a dozen candidates in the general election earlier this month, far-right candidate Bolsonaro defeated his opponent. Bolsonaro received 55 percent of the vote in the runoff, comfortably ahead of the runner-up, center-left candidate Fernando Haddad, who received 44 percent of the vote. He will be sworn in on Jan. 5, 2019, to begin his four-year term as the 37th president of Brazil.

Controversial campaign polarized voters

Bolsonaro, a former army paratrooper, positioned himself as a tough-talking straight shooter during the campaign, declaring himself a “social conservative” and “economic liberal.” His Brazil-first rhetoric, in the populist style of the current U.S. President, earned him the nickname “Tropical Trump.” His incendiary remarks about women, minorities, members of the LGBT community and other marginalized groups, as well as his stated admiration for Brazil’s former military dictatorship, polarized the electorate during the campaign. However, after repeated incidents of corruption among Brazil’s ruling parties and shrinking gross domestic product, voters overlooked the rhetoric and chose a candidate who positioned himself as a political outsider and a committed reformer.

Markets react positively to results

The results of the first round of the election suggested Bolsonaro would ultimately be elected by a comfortable margin. This appeared to calm the financial markets a bit. Brazilian equities rallied, and the Brazilian real gained approximately 10 percent in the runup to the runoff. Bolsonaro’s selection of Paulo Guedes, a University of Chicago-educated economist and financier, as his chief economic advisor further suggested he would pursue market-friendly policies while reducing fiscal spending and improving the economy.

Plans for reform, but in what order?

The new president ran on a reform platform, promising judicial, economic and environmental reforms to transform Brazil’s economy. Investors wonder what the priorities of those reforms will be. 

  • Law and order: Bolsonaro’s platform is famously tough on crime. Throughout the campaign, he vowed to relax gun laws in Brazil as a means of empowering citizens to fight crime. He also promised less oversight of the police, including new rules that would make it difficult to punish officers involved in shootings of civilians. Another proposed new law would lower the age of incarceration.
  • Privatizations: Bolsonaro promised selective privatization of some of Brazil’s state-owned enterprises (SOEs). Finance minister Guedes will have authorization to privatize close to 150 SOEs, putting proceeds toward paying down public debt. It remains to be seen which assets will be labeled off-limits by the president.
  • Pensions:  Reform of Brazil’s expensive and lopsided pension system is a top priority of the incoming finance minister Guedes. But, it remains to be seen how high it is on the new president’s to-do list. He has dismissed the proposal put forward by the former president Michel Temer and has yet to declare his own preferences. Economists expect, however, that some form of pension reform will be undertaken early in the new administration.
  • Environmental: Environmentalists—both within and outside Brazil—are not fans of Bolsonaro. He campaigned on threats to leave the Paris climate change accord and on the promise to reduce regulation of Brazilian farmers. Bolsonaro would allow farmers to increase deforestation on their lands, including in the Amazon rainforest. These plans united climate scientists and environmentalist against him. In addition to any potential impact on climate change, these policies are significant for the impact they will have on Brazil’s exports and global trade. Much of the newly deforested land is being replanted with soybeans. Brazil is the world’s second largest producer (behind the U.S.) of this crop. Its chief buyer is China, who continues to look for new sources of protein for its massive population. Given China’s ongoing trade conflicts with the U.S., which include tariffs on soybean exports, it is possible the demand for Brazilian soybeans—and land to cultivate them on—could grow exponentially. This would, of course, also affect demand for U.S. soybean growers; China is their top international customer as well.

Does Bolsonaro have a mandate to deliver on his promises?

The election results clearly indicate voters in Brazil want the country to go in a new direction. After years of highly visible corruption and stagnating economic conditions, Brazilians rejected the opposition left-wing PT (Partido dos Trabalhadores, or “Workers Party”), which has ruled the country for most of this century. Disparate factions of the electorate united under Bolsonaro and his far-right PSL (Partido Social Liberal) party as a means of destroying the cycle of recession and corruption.

Bolsonaro and his new cabinet will undoubtedly declare a mandate from the people to dive in and begin implementing their campaign platform. Given his populist stance, he will likely enact his promised law and order reforms first. Swift implementation is not a done deal, however. Brazil’s congress comprises more than 30 political parties, with the just-defeated PT as a majority. Bolsonaro will have to transform from fiery campaigner to consensus builder to realize some of his proposals.

Regardless of how long it takes to enact this platform, global markets appear to expect that the new administration will be positive for Brazil’s economic performance in the near term in the form of reduced fiscal spending, higher growth rates, tax reform and a stronger currency. The evidence is the uptick in Brazilian equities and the rise of the Brazilian real. Of course, global markets will also react once the new president announces the rest of his cabinet and solidifies the direction of his administration. The “social conservative” side of the new president’s makeup, including increased power for the police and military, will also exert influence on Brazil’s fortunes. How those two sides of the new Brazil ultimately play out remains to be seen.

 

 

Nathan Chaudoin
Nathan Chaudoin
Global Growth Equity
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      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.