Bolsonaro wins Brazilian presidential elections

In a historic shift for the country, Brazilian voters have elected Jair Bolsonaro to lead the country for the next four years.

The Social Liberal Party’s (SLP) candidate and former army captain Jair Bolsonaro has won Brazil’s presidential election with 55% of the vote. His opponent Fernando Haddad, former São Paulo Mayor and the presidential candidate of the left-wing Workers’ Party, secured 45% percent of the second-round ballot. Jair Bolsonaro becomes the 38th President of Latin America’s biggest country as voters choose to turn the page of years of recession and corruption scandals. The polarised presidential race clearly showed that voters have rejected Brazil’s political establishment, paving the way for the first far-right administration since the end of the military dictatorship thirty years ago. Divided and disillusioned, Brazil is desperate for change while economic challenges abound.

Jair Bolsonaro, the far-right outsider in a polarised race

In our CIO Flash Bulletin “Brazil’s polarised election” published in September, we described the 2018 election campaign as particularly unpredictable: Jair Bolsonaro was stabbed at a campaign event, former president Luiz Inacio Lula da Silva abandoned his prison-cell campaign and Mr Bolsonaro – helped by a group of influent Brazilian entrepreneurs – was accused of conducting an illegal large-scale misinformation campaign attacking his rival Fernando Haddad through the smartphone messaging service WhatsApp.

The presidential race was undoubtedly dramatic and few were predicting the victory of Jair Bolsonaro six months ago when he was simply perceived to be an unusual candidate who was massively using social networks to promote his political ideas. Born in 1955, he represents the right wing on the Brazilian political chessboard. He was elected a Congress deputy seven times since 1991, after serving in the army for almost 20 years. He is often described as the “Tropical Donald Trump” or the “Brazilian Duterte” (in echo to the Philippines’ President Rodrigo Duterte) because of his aversion towards elites, his traditional values and his strong appetite for authoritarianism. Beyond his rejection of the legacy of the Workers’ Party rule, Mr Bolsonaro will now have to clarify his agenda and may reassure citizens of his commitment to democracy after having defended Brazil’s former military dictatorship, which ruled from 1964 to 1985.

Like President Trump and President Duterte, Mr Bolsonaro is known for offensive remarks about women, black people and sexual minorities – contrasting with the traditional political correctness usually associated with political leaders. Like President Trump, Mr Bolsonaro wants to rethink the country’s strategic alliances, especially its attachment to developing countries blocs such as Mercosur. Like President Duterte, Mr Bolsonaro wants to put the army on streets to fight crime, promises to give all means to authorities to shoot at criminals and advocates for softer regulations for gun ownership. But even if Brazil embraces his populist arguments, the country is neither the United States nor the Philippines and Mr Bolsonaro will need to tackle some very specific economic and social challenges.

Brazil is emerging from its worst-ever recession and needs crucial structural reforms

While the economy experienced a period of meaningful economic growth from 2004 to 2013 with an average annual gross domestic product (GDP) growth of 4.5%, the country made a U-turn in 2015 that plunged Brazil into a deep recession. The economy contracted by 3.8% in 2015 and 3.6% in 2016, inflation doubled and, in July 2015, the central bank increased rates to a decade-high of 14.25%. Low commodity prices put the economy under further pressure, and the Brazilian real dropped more than 40% against the US dollar between January 2014 and September 2015. This brutal economic recession has since been exacerbated by several political scandals with the impeachment of former President Dilma Rousseff in August 2016 and the corruption charges brought against former President Michel Temer in 2017.

Brazil is now emerging from its worst-ever recession but the economic recovery is in its early innings. The macroeconomic landscape might look supportive: economic growth is in positive territory since 2017, inflation is close to a two-decade low and the current account is almost balanced. Nevertheless, the country’s fiscal deficit is running at 7.3% of GDP while the public debt-to-GDP ratio is already around 85%. Consequently, there is an urgent need to conduct structural reforms, starting with the complex loss-making pension system that is swallowing one-third of government spending before interest.

Although Bolsonaro is viewed as a reformist, he will require political alliances in Congress because he lacks a wider coalition. For the time being, investors like his economic philosophy in favour of mass privatisations and spending cuts. The credibility of his economic programme is backed by Paulo Guedes, a well-known neoliberal chief economic adviser who co-founded Banco Pactual (now BTG Pactual) in the 1980s. Brazilian assets have rallied in October: the Brazilian real is up 11 percent against the US dollar and the Ibovespa benchmark stock index gained more than 8 percent this month. However, market optimism could rapidly fade if the country gets a fragmented Congress unable to pass crucial structural reforms. Finally, it is worth mentioning that one of the main losers of this election is the environment because the newly elected president has expressed his desire to eliminate Brazil’s environment ministry, withdraw from the Paris climate agreement and undo a number of environmental policies in favour of economic development.

Investment implications

There is an urgent need for reform in order to limit debt, notably a pension reform which we consider critical for the country. Without this, we believe that the recent market rally could be short-lived. Therefore, we remain cautious on Brazilian assets and will be closely watching the efforts to ensure the much-needed fiscal sustainability. Looking at the wider emerging market universe, this is a difficult year – rates are rising in the US, the US dollar is strong, trade disputes are intensifying and fundamental vulnerabilities are apparent in some emerging countries such as Argentina and Turkey. Since June, we have reduced exposure to emerging market debt in local currencies and our current allocation to emerging assets across portfolios is close to neutral. We believe that Jair Bolsonaro is a divisive president who will need to prove that he is capable of reforming Brazil. To his opponents, he represents dangerous authoritarian populism, but his supporters see him as the ray of hope after years of economic difficulties and political scandals.