Brazilian election swing to the right – Jair Bolsonaro new president

In a climate of political polarisation and in protest against the political class that has been ruling the country until now, Brazil’s electorate has voted for the right-wing extremist Jair Bolsonaro to be their new president. In the run-off ballot against Fernando Haddad from the left-wing workers’ party PT, Bolsonaro pooled around 55 percent of the votes. Markets have responded very positively to his victory because they hope to see some key liberalisations made under his rule.

What does his election victory mean for the country’s economy? Bolsonaro has made it known on several occasions that he understands little about economic issues and that he wants to leave the fundamentals and implementation of his economic policy above all to his chief advisor Paulo Guedes. Guedes is regarded as an orthodox-liberal economist and is also likely to be appointed as member of the new cabinet. He advocates formal independence for the central bank, something welcomed by investors. He also advocates privatisations that would generate sufficient revenue for companies to be granted tax reductions. Cutbacks are to be made to social benefits and subsidies, and an attempt made to tackle the overdue pension reform. Guedes believes that the elimination of government regulation could loosen the investment backlog and thus stimulate the economy.

But this is also where differences of opinion with Bolsonaro are starting to materialise. In the final phase of the election campaign, the new president qualified many of his ideas that were aimed at the economy. Privatisation should not be allowed to get out of hand. A „sellout“ of the rich Brazilian raw material reserves, for instance, or of state-owned companies active in this sector to foreign buyers (China?) must be avoided. Nor should any attempts be made to curb individual entitlements to pensions and other social security systems acquired to date. How fundamental reforms are supposed to succeed in these conditions is questionable. A two-thirds majority will be needed for each of the most important projects to pass through parliament. Bolsonaro will therefore need to address the group of left-wing parties to achieve this. In the future fragmented parliament made up of thirty parties, a pragmatic course will have to be taken by the new government.

The election outcome has now removed an important uncertainty factor for investors, giving investment activity impetus, at least in the short term. The positive market reactions are therefore comprehensible. But the question remains how long this „honeymoon“ can last. The real test will come by next year at the latest. If the economy is not on a safe track by then and there is a breakdown in key reform projects necessary for consolidating the budget, the investment momentum could stall and Brazil find itself back in a crisis.

 

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