News | Question of the Week, WC 15th October
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Q: How will Markets and the Economy React to Mr. Bolsonaro's Win in Brazil?
A. Sunday 28th will bring closure to an extraordinary presidential election campaign in Brazil. The polls correctly predicted the first-round result and, assuming they are right in the second round too, Mr. Bolsonaro will comfortably beat Mr. Fernando Haddad, unless something very unusual happens. Our core view is shared by the markets, which are comfortably positioned for Mr. Bolsonaro's victory. Equities have rebounded since mid-September and likely will hold their gains once his victory is confirmed, though flows have reversed in recent weeks, following an impressive September. Sovereign bond spreads have compressed, and the BRL is close to a six-month high. We see little additional upside to this trade in the short run, as a victory for Mr. Bolsonaro already is priced-in, but plenty of downside in the event of an unforeseen result in a week's time. A shock victory for Mr. Haddad would lead to a devastating plunge in Brazilian markets.
We look for the BRL to strengthen to slightly more than 3.55 per USD if Mr. Bolsonaro wins. Further BRL appreciation is limited, in our view, as his government will have to face many economic and fiscal challenges. Next year, markets and financial metrics likely will come under renewed stress, as the new government faces an uncooperative Congress. It will have to make concessions, just to muddle through. Volatility will return when political news hits the headlines, with the currency once again coming under renewed pressure. Mr. Bolsonaro's win is the less-bad option for Brazil, but that doesn't mean that the economy will be out of the woods immediately. So far, we know little about his economic program, especially pension reform, and just recently Mr. Bolsonaro has already backed away from the privatization of companies which would bring in real revenue, including Electrobras. Profit-taking after Mr. Bolsonaro wins seems a good bet.
On the economy, meanwhile, the good news for Mr. Bolsonaro is that he will inherit a country doing relatively well. The recovery will continue to be supported by low inflation, improving labour and credit markets, benign conditions for Brazil’s top exports, and a gradual improvement in confidence. The prospect of less government intervention in the economy, if he follows the advice of his economic team, likely will lead to a gradual rebound in business confidence and an acceleration in capex. This, coupled with improving labour and credit markets, boosting private consumption, suggest that Mr. Bolsonaro will enjoy a relatively resilient economy when he reaches office. But real risks remain so we are going to keep a cautiously optimistic view over the next year, waiting to see how the politics progress. In addition, Mr. Bolsonaro will face a challenging global environment with tightening financial conditions and an ongoing trade war with China, one of Brazil main trading partners. In short, if Mr. Bolsonaro wins, he will have to balance the pressing needs of his extremely complicated domestic agenda against a backdrop of an uncertain and ever-changing world economy. He won’t have it easy.
Andres Abadia, Chief Latam Economist
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Posted: 19th Oct 2018
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