The Daily Update - Brazil & Bolsonaro

Far-right candidate Jair Bolsonaro has been voted in as the next Brazilian President securing 55.1% of the vote, convincingly ahead of the Workers’ Party candidate Fernando Haddad who secured 44.9% of the vote.

Bolsonaro’s anti-corruption and anti-crime rhetoric has obvious voter appeal: according to the BFPS there were a record 63,880 homicides in Brazil in 2017 and the Workers’ Party has been unable to distance itself from the Lava Jeto or Car Wash scandal. The economy has also been mired by recession in 2015 and 2016 and with an unemployment rate of 12 percent adding to voter frustration and the hope change can bring some better times. Bolsonaro and his economic adviser Paulo Guedes have advocated the need for reforms to put Brazil on a more sustainable fiscal path talking about privatising some state companies and tough measures such as reforming the pension system which is costly and unsustainable with an ageing population. However, Bolsonaro has also been accused of espousing racist, misogynistic and anti-gay views so there is plenty of scope for further divisions and polarisation of society along the way.

Bolsonaro is saying some of the right things for investors commenting in his victory speech: ‘We will break the vicious cycle of growing debt,’ and ‘Substitute it with the virtuous cycle of smaller deficits, falling debt and lower interest rates.’ That said, Bolsonaro will require Congressional support from other parties to push through his reform agenda as while his PSL party has secured 52 seats in the lower house the house is comprised of 513 seats and 30 parties.

Bolsonaro’s victory was expected and asset prices have moved to factor some of this in: this month the Brazilian Real has been one of the few currencies to appreciate against the US dollar (+11.2%), the Bovespa index is up ~8% when most equity markets are down, the 10 year USD Brazil 4.625% 2028 bond yield has tightened 37 bps to 5.42% (~2 notches expensive for a BB- rating on our models).  However, Bolsonaro will not take up office until 1 January and will need to deliver on tough reforms to put Brazil on a more sustainable growth path.

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