Despite the possible risks and populisms, the market’s hopes and expectations were fulfilled and Jair Bolsonaro (PSL) moves to the second round of the presidential elections in Brazil; where he will be tested in both support and popularity against Fernando Haddad, the Worker’s party (PT) candidate. The result, while reassuring for the market, does not dispel all risks.
Although final election results will not be revealed until next October 28th, this is a clear indication of in which direction the political winds are blowing in Brazil.
“Losing the presidency is really in Bolsonaro’s hands. Today there will be a strong rebound of Brazilian assets, as financial markets assume that Bolsonaro will become the next President of Brazil in the second round of elections later this month. More than anything, it’s a sigh of relief for the market that leftist candidate Haddad, whose policies would not have helped Brazil out of its current economic hole, will almost certainly not become President,” says Edwin Gutierrez, Head of Emerging Markets Sovereign Debt at Aberdeen Standard Investments.
The reason is simple: much of Bolsonaro's appeal is the fact that he is not part of the political establishment, which has completely lost its credibility in recent years. “He also has a credible plan of how to deal with two of Brazil's most pressing economic problems: the cost of its pension system and its debt stock. Addressing these issues has probably become more difficult as a result of these elections. His party has won a larger bloc in Congress than what it had previously and the unfortunate results of other parties could lead to some defections, which should help him,” adds Gutierrez.
This result has allowed Brazilian markets to continue with their recent rally, as they were worried that the Workers' Party could return to occupy the presidency. However, Paul Greer, Portfolio Manager at Fidelity International, observed that Brazil has challenges that go beyond achieving a new government.
In his opinion, if Bolsonaro wins in the second round, the post-electoral euphoria would soon disappear. “Bolsonaro's controversial far-right opinions will make it difficult for his administration to approve legislative measures given the limited presence of his party, the PSL, in the Senate (5% of seats) and in the lower house (10%).”
According to the analysis carried out by the Fidelity International portfolio manager, elections aside, “we believe that Brazil’s fiscal balances will continue to deteriorate and that the sovereign rating will continue its decline towards a B rating over the next 12 to 18 months. The country's growth is still below its potential level and we expect it to continue at that slow pace in the near future.”
The main concern for Renta 4 Banco is that, regardless of the final result on October 28th, no party has a clearly reformist plan. It would be necessary to control public accounts and reform social security and pensions. “Even so, and as we have seen in Mexico, where the new government seems to be orthodox in its economic decisions, we do not rule out that something similar happens in Brazil, which in turn could translate into a recovery of the Brazilian Real and be positive for securities with high interests in the area,” the financial institution points out in its latest report.