From Sunday evening it's official: Jair Bolsonaro won the first round of the presidential elections in Brazil and will have to face Fernando Haddad of the PT (Workers' Party) in the ballot on 28 October. 46% of the votes obtained by Bolsonaro far exceeds the result expected in the polls and the 17% gap over opponent Haddad is greater than expected. Bolsonaro will therefore go to the ballot in a strong position having significantly increased his chances of being elected President of Brazil. Furthermore, even candidates in line with Bolsonaro's program performed better than expected in the elections for the senate and the chamber of deputies.
In the short term, Brazilian markets will continue to benefit from the rally triggered by this news, after nervousness at the prospect of a PT candidate once again taking office in the presidential palace. However, while markets are likely to welcome the results of the first round, Brazil's future looks very uncertain in the aftermath of the elections. In case Bolsonaro wins in the second round, we expect the momentum to fade before long, despite his pragmatic view on Brazil's fiscal position. Bolsonaro's controversial far-right views will make it difficult for his party to legislate as the PSL, which he represents, has a very small share of seats in the Senate (5%) and the Chamber (10%). Congress is today more fragmented than ever and Bolsonaro's big goal, which is to implement much-needed tax reform, will be very difficult to achieve as the president will have to work with the center parties and the PT to pass the laws . Moreover, whether Jair Bolsonaro or Fernando Haddad wins, neither the ability nor the political will to implement tax reforms seems certain.
Those in progress are undoubtedly the most divisive election ever recorded in the democratic history of Brazil and have highlighted the profound polarization of internal political dynamics that has taken place in recent months. The election campaign was dominated by issues such as security and corruption, which fueled the anti-establishment vote. While Bolsonaro is in a particularly strong position, we expect the next 3 weeks to be characterized by volatility, both in polls and in the markets, as aversion to both him and Haddad is very high on the opposing sides. The initial polls for the runoff will be extremely important as the market begins to understand the extent of the transfer vote from losing candidates. Haddad's great debating prowess and equal TV time granted to him and Bolsonaro are two other key factors to monitor.
Regardless of the election, we expect that Brazil's budget balances will continue to deteriorate and that its sovereign rating will experience further downgrades towards single B in the next 12-18 months. Brazil's growth remains below its potential and we expect the stagnation to continue for the foreseeable future. We also believe that the country's monetary policy is too accommodative and that interest rates need to rise, as we estimate inflation will do so over the next 6-12 months."
°°°The author is Portfolio manager of Fidelity International
