Brazil Election: Right-winger Bolsonaro to be next president

By
Sunday, October 28, 2018

Jair Bolsonaro, a controversial figure with extremist views on dictatorships, gays and guns, mixed with a pro-market agenda, was elected president of Brazil on Sunday. With 94.4% of the votes counted, Bolsonaro had 55.5% and his rival Fernando Haddad of the leftist workers party (PT) 44.5%.

Ultra right-wing lawmaker since 1991 and a former army captain, 63-year-old Bolsonaro has admitted he has little knowledge of economic issues and announced his intention to name Paulo Guedes as finance minister.

Start your 15 day free trial now!

cta-arrow

Already a subscriber? Please, login

Guedes, an economist who holds a PhD from the University of Chicago and is considered a liberal, supports privatizing state-run companies and lowering corporate taxes. He was one of the founders of investment bank BTG and is a partner at local investment house BR partners.

CHALLENGES AHEAD

Bolsonaro will face serious challenges in putting the country's economy on course for sustainable expansion.

After contracting 3.5% in 2015 and also in 2016, Brazil's economy -the biggest in Latin America- grew just 1% last year and a similar rate is projected for this year, which is considered low for a developing nation and unlikely to reduce significantly the double-digit unemployment rate.

The top priority, according to analysts, is the approval of highly controversial and unpopular pension reforms. As the measures require changes to the constitution, the reforms need strong political support. To be approved in the lower house, they must win the backing of at least 308 lawmakers out of a total of 513.

President Michel Temer, who assumed the post after the impeachment of Dilma Rousseff in mid-2016, was not able to approve the reforms.

Despite his low popularity among Brazilians, Temer is recognized as a politician with a good relationship with legislators but even that was not enough following allegations of his involvement in a corruption scheme.

The pension reform is considered crucial in order to cut government debt and fiscal spending in the long term.

Also, Bolsonaro is expected to reduce political influence in strategic posts.

"With the election of Bolsonaro, in the short term he is likely to respect technical criteria in naming officials for key posts, such as ministers and executives of state-run companies, as during his campaign he highlighted that he will not be influenced by political pressures," Luciano Rostagno, Latin America chief strategist at Banco Mizuho, told BNamericas. "Such a strategy tends to be welcomed by investors in the short term and Brazilian assets tend to appreciate."

However, according to Rostagno, Bolsonaro's strategy to weaken the government's relationship with traditional political parties represents risks.

"The success of an administration is highly dependent on the formation of a strong coalition, between the ruling party and a base of other parties to guarantee support for contentious issues. Bolsonaro said that his strategy will be to look for support on a case-by-case basis, without the participation of major parties I'm really not sure about the prospects for the success of this in the long term," he added.

Mizuho's strategist is not alone in underscoring the risks for Bolsonaro's administration.

"Despite this optimism in the markets, the latest policy announcements [as well as the fragmented nature of congress] suggest that Bolsonaro will disappoint investors' expectations for reforms. Ultimately, that could put the recent rally into reverse," said William Jackson, an economist at Capital Economics.

The president-elect is a member of the small Partido Social Liberal, or PSL party. He takes office January 1.

BANKING SECTOR

On the incoming government's strategy for the banking sector, market players expect efforts to reduce concentration will continue in order to increase competition and lower interest rates.

The central bank is working on measures to promote fintechs and pave the way for smaller banks to enter the market.

"The opening of Brazil's banking industry is part of a global trend and there is no way back. Fintechs, digital banks, are the future and the monetary authority will continue to work on regulations to ensure that. This is not a strategy of only one candidate, this is a long-term strategy of the country," Marcos Mansur, founder and CEO of Brazilian asset management firm SRM told BNamericas.

According to local media, Bolsonaro is planning to invite Ilan Goldfajn to stay on as head of the central bank, although so far Goldfajn has not responded.

INFRASTRUCTURE

Bolsonaro's plan on infrastructure projects includes the possibility of renewing contracts in advance and re-auctioning those that present problems. Bolsonaro plans to expand railroads, highways and airports almost exclusively with private resources.

"The goal is not to put in more government money. The limit is what is in the budget currently," said Paulo Coutinho, an economist who oversees infrastructure proposals of the PSL, in a recent interview for O Estado de S. Paulo newspaper.

After several years of poor economic performance and increases in spending, the government will face huge fiscal challenges in the coming years, and will have to tackle growing debt.

According to the economist, the plan is to impose certain limits on loans granted by development bank BNDES, leaving the bank more space to draw up projects instead of assuming a major part of the financing.

"We don't want to put more money in through BNDES, there is already a lot there," he said. According to Coutinho, Brazil is very attractive and investors will come. "What is lacking is legal security and better projects."

UNPRECEDENTED ELECTION

The 2018 presidential election was unprecedented and highly polarized. Bolsonaro suffered an assassination attempt during a campaign rally in September, limiting his speeches and preventing him from participating in debates, as he recovered from surgery.

Meanwhile, Haddad was confirmed as the PT's candidate only in September, in place of party founder and former president Luiz Inácio Lula da Silva.

Lula was the clear frontrunner, but was unable to run as he is serving a 12-year prison sentence for corruption.