Jair Bolsonaro easily won the First round of the Brazilian Presidential Elections last night and now moves into a 2nd round run-off with Fernando Haddad from the PT party on 28th October. Bolsonaro’s tally of 46% of the vote was much higher than the polls had been suggesting, while the +17% gap over Haddad was wider than anticipated. This puts Bolsonaro in a very strong position for the run-off and has emboldened his position as the resounding favourite to be Brazil’s next President. Combined with this, candidates aligned with Bolsonaro also did better than expected in the senate and lower house elections.
In the short-term Brazilian markets will continue their recent rally on this news as the market has fretted about the potential return of a left-wing PT party candidate to the Presidential Palace. However, while markets will undoubtedly cheer the 1st round result overnight, the outlook for Brazil looks very challenging beyond the elections. In the scenario of a Bolsonaro victory in the second round we would expect that post-election euphoria to fade quickly, despite his pragmatic views on Brazil’s fiscal position. Bolsonaro’s controversial far-right views will make it difficult for his administration to pass legislation given the small presence of his PSL party in both the senate (5% of seats) and the lower house (10% of seats). Congress is now more fragmented than ever and Bolsonaro’s primary task of achieving Brazil’s much needed fiscal reform will be extremely difficult given he will have to work with centralist parties and the PT party to pass laws. Indeed, in the scenarios of a victory for either Jair Bolsonaro or Fernando Haddad, it is difficult to see either the political ability or willingness to enact fiscal reforms.
This has been arguably the most divisive election in Brazil’s democratic history and has illustrated the deep polarisation of domestic politics in recent months. In a development comparable to many other countries around the world, this vote has illustrated the sharp decline of establishment politics in Brazil with traditional parties such as PMDB, PSDB and PT all struggling to connect with the nationwide population. This election campaign has been dominated by issues such as security and corruption which has helped the anti-establishment vote. While Bolsonaro is now in a very strong position, we expect the next 3 weeks to be volatile for both polls and markets as the rejection rates of both Bolsonaro and Haddad are extremely high. The initial polls for the second round will be extremely important as the market begins to get a sense for vote transfer from the eliminated candidates. Haddad’s strong debating ability, and the equitable TV time between Bolsonaro and Haddad, will be other key factors to watch.
Away from the election we expect Brazil’s fiscal balances to continue to deteriorate, and for the sovereign rating to continue on its path of downgrades towards a “Single B” rating over the next 12-18 months. Brazil’s growth remains sub-potential, and we expect it to remain sluggish for the foreseeable future. We also feel Brazil’s monetary policy is too loose and interest rates need to rise given our expectations of higher inflation in Brazil over the next 6-12 months.