On October 28th, Jair Bolsonaro of Brazil’s Social Liberal Party (PSL) defeated Fernando Haddad of the Worker’s Party (PT).
Bolsonaro, a candidate coming from the far-right of the political spectrum, picked up 55% of the vote. This outcome can largely be attributed to three factors: Brazil’s lethargic and largely jobless economic recovery, a decline in public security, and a strong and sustained anti-corruption wave first instigated by the unprecedented Lava Jato investigation.
The most important of these factors was the lack of a strong economic recovery following the end of Brazil’s recession in 2017, the deepest in its history. Through September of this year, Brazil’s economic activity index showed that the overall economic output in the country remained 6.5% below where it stood at the same point in 2014. In the last twelve months, Brazil’s unemployment rate has eased just barely from 12.4% to 11.9% (mostly driven by individuals leaving the labor force rather than finding jobs), while investment, which contracted by 14% YOY in 2015 and 12% YOY in 2016, climbed by just a meager 4.3% YOY.
These economic trends were then exasperated by both a deteriorating security situation across Brazil’s major cities, driven by rising unemployment itself in addition to cuts to public security funding, and a strong anti-corruption wave. Both of these forces clearly favored Jair Bolsonaro, the ex-army captain who was perceived to be the “cleanest” of the candidates. (His opponents, Fernando Haddad and PSDB candidate Geraldo Alckmin, were both indicted for corruption and money laundering the month prior to the election.) Bolsonaro also portrayed himself as a strong-man capable of bringing order to the country via policies such as the liberalization of arms for private citizens and greater permission for police to use deadly force to stop crime.
To understand where Brazil’s economy will go following the election of Jair Bolsonaro, it’s necessary to first understand why the economic recovery to date has been so lethargic. This can largely be laid at the feet of one monumental failure of the current government under President Michel Temer: the lack of a comprehensive pension reform.
As it stands today, the World Bank estimates that Brazil’s debt to GDP ratio, which currently stands at approximately 75%, would rise to above 150% by 2030 without a significant fiscal adjustment led by reform to the country’s existing pension benefits. This bleak outlook, and the continued lack of clarity around a potential fix, is the major driver of why financial institutions have yet to aggressively increase lending and why businesses appetite for new investment has remained muted.
Jair Bolsonaro was the only candidate in the run-off election that supported a reform of the pension system, which may be why, despite his bombastic rhetoric on campaign, yields on Brazil ten-year treasuries fell by more than two percentage points and the currency ratio appreciated from 4.1 (Brazilian real to USD) to 3.62, between September and the day following the final electoral outcomes. (Since then, though, both indicators have moved slightly in the opposite direction, largely due to global market conditions). This demonstrates falling inflation expectations and a stronger outlook for growth, as markets believe he will likely achieve what others could not, and thus return the country to a steadier path of economic expansion.
There are still fundamental concerns over whether Bolsonaro, once being sworn in on January 1st, will pursue some of his potentially more destabilizing policy proposals, such as liberating gun ownership or reducing restrictions on the exploitation of delicate areas in the Amazon rainforest for economic gain. While my firm Frontier Strategy Group is forecasting growth in Brazil at 3.0% in 2019 up from 1.6% in 2018, we believe both Bolsonaro’s extreme position on some subjects, and perhaps more importantly his lack of experience in a position of true power, are risks to his ability to sustain the political support necessary to pass the reforms that Brazil needs. Likewise, political miscalculation have proven to come with heavy consequences for the country’s past leaders, with just two of the four directly elected presidents under the current constitution having actually completed their last terms in office (and one of those who did is now imprisoned for corruption and money laundering).
Our forecasts suggest that while Bolsonaro is likely to pass pension reform in 2019 (both raising the retirement age and also reducing benefits), he is unlikely to make dramatic inroads into addressing other ills of the market, such as its burdensome tax system, its challenging labor code, or its underfunded infrastructure. And despite some of his past statements, we also don’t see Bolsonaro as an immediate threat to Brazil’s democratic institutions.
Bolsonaro did not win with as much popular support as it might first appear — he took 55% of the valid votes, but just 43% of the total electorate after considering blank votes and abstentions. He also does not have the sustainable super majority in Congress needed to pass constitutional amendments without significant efforts at coalition building (which require 308 votes in Brazil’s lower house and 49 votes in the Senate – in rather two votes through each body). While Bolsonaro’s party picked up 44 additional seats in the lower house, to hold 52 total seats, there remain 30 parties in Congress, making coalition building a matter of constant horse trading.
For all of the differences between Bolsonaro and his predecessors, he will face many of the same governing challenges that they did.
While there are many factors across the world driving economic volatility and uncertainty — Brexit, U.S.-China trade tensions, currency upheaval in markets such as Argentina and Turkey — that could result in more populist events over the next few years, or at least anti-establishment forces coming to power, we could also easily see a further push back against these forces.
That is to say that the forces that brought Bolsonaro to power in Brazil cannot be read as indicative of a cohesive global trend. In fact, as we have seen, Bolsonaro’s rise in Brazil was the result of a combination of largely unique domestic factors: an economic recession driven largely by domestic factors, rising insecurity, and a sustained anticorruption wave ignited by an unprecedented investigation targeting the country’s most powerful individuals.
In that sense, while companies should not be worried about an underlying global trend lending itself to the election of highly unpredictable heads of state, the case of Brazil clearly demonstrates the need for continued application of scenario-based planning across high stakes markets to ensure the ability to rapidly adjust to downside risks, but also take advantage of sudden emergence of new opportunities.
Source: Harvard Business Review