Social Liberal Party (SLP) candidate and ex-army soldier Jair Bolsonaro won the Brazilian presidential election with 55% of the votes. His opponent Fernando Haddad, former mayor of São Paulo and presidential candidate of the leftist Workers' Party, secured 45% of the second round. Jair Bolsonaro becomes the 38th president of Latin America's largest country, as voters have chosen to move on from years of scandal, recession and corruption. The polarized presidential race has clearly demonstrated that voters have rejected Brazil's political establishment, paving the way for the first far-right administration since the end of the military dictatorship three decades ago. Divided and disillusioned, Brazil is desperate for change, while economic challenges abound.
Jair Bolsonaro, the far-right outsider in a polarized race
In Lombard Odier's CIO Flash Bulletin "Brazil's Polarized Elections" published in September, he describes the 2018 election campaign as particularly unpredictable: Jair Bolsonaro was stabbed during an election campaign event, former President Luiz Inacio Lula da Silva has abandoned his campaign from jail and Mr Bolsonaro – aided by a group of influential Brazilian businessmen – has been accused of waging a large-scale illegal disinformation campaign that attacks his rival Fernando Haddad through the smartphone messaging service WhatsApp. The presidential race was undoubtedly dramatic and few predicted Jair Bolsonaro's victory six months ago, when he was simply perceived as an unusual candidate who was massively using social networks to promote his political ideas.
Born in 1955, he represents the right on the Brazilian political chessboard. He has been elected to Congress seven times since 1991, after serving nearly 20 years in the military. He is often described as the "Tropical Donald Trump" or the "Brazilian Duterte" (echoing Philippine President Rodrigo Duterte) due to his aversion to elites, his traditional values and his strong desire for authoritarianism. Beyond his rejection of the legacy of Workers' Party rule, Bolsonaro will now have to clarify his agenda and be able to reassure citizens of his commitment to democracy after defending Brazil's former military dictatorship, which has ruled since 1964 to 1985. Like President Trump and President Duterte, Bolsonaro is known for offensive remarks about women, black people, and sexual minorities — as opposed to the traditional political correctness usually associated with political leaders. Like President Trump, Bolsonaro wants to rethink the country's strategic alliances, especially its attachment to developing-country blocs like Mercosur. Like President Duterte, Bolsonaro wants to put the army on the streets to fight crime, promises to give all means to the authorities to shoot criminals and advocates the need for softer rules for the possession of weapons.
But even if Brazil embraces its populist arguments, the country is neither the United States nor the Philippines, and Commissioner Bolsonaro will face some very specific economic and social challenges. Brazil is emerging from the worst recession in its history and needs major structural reforms While the economy experienced a period of significant economic growth from 2004 to 2013 with an average annual growth of gross domestic product (GDP) of 4,5% , the country made a turnaround 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 raised rates to a ten-year high of 14,25%. . Low commodity prices put the economy under further pressure, and the Brazilian real fell more than 40% against the US dollar between January 2014 and September 2015. This brutal economic downturn was exacerbated by several political scandals with l impeachment of former president Dilma Rousseff in August 2016 and the corruption allegations against former president Michel Temer in 2017.
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Brazil is now emerging from the worst recession in its history, but the economic recovery is in its infancy
The macroeconomic scenario might seem favourable: economic growth has been positive since 2017, inflation is close to an all-time low and the accounts are almost balanced. However, the country's budget deficit stands at 7,3% of GDP, while the public debt-to-GDP ratio is already around 85%. As a result, there is an urgent need to conduct structural reforms, starting with the complex, loss-making pension system that is gobbling up a third of public spending before interest. Even if Bolsonaro is seen as a reformist, he will need political alliances in Congress because he lacks a broader coalition. For now, investors like his economic philosophy in favor of mass privatization and spending cuts. The credibility of his economic program is backed by Paulo Guedes, a well-known neoliberal chief economic adviser who co-founded Banco Pactual (now BTG Pactual) in the 80s.
The Brazilian real is up 11% against the US dollar and the benchmark Ibovespa stock index has gained more than 8% this month. However, market optimism could quickly 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, as the newly elected president has expressed his desire to eliminate Brazil's environment ministry, withdraw the country from the Paris climate agreement and cancel a series of environmental policies in favor of economic development.
Investment implications
There is an urgent need for reform to limit debt, especially a pension reform that we consider crucial for the country. Without it, we believe the market's recent recovery could be short-lived. Therefore, we remain cautious on Brazilian assets and will closely monitor efforts to ensure much-needed fiscal sustainability. Looking at the broader emerging market universe, this is a challenging year – rates are rising in the US, the US dollar is strong, trade disputes are intensifying and fundamental vulnerabilities are evident in some emerging market countries such as Argentina and Turkey. We have reduced exposure to local currency emerging market debt since June and our current allocation of emerging market assets across portfolios is close to neutral. We believe that Jair Bolsonaro is a dividing president who will have to prove that he is capable of reforming Brazil. To his opponents he represents a dangerous authoritarian populism, but his supporters see him as a ray of hope after years of economic woes and political scandals.
