Posted on: The Financial Times October 17, 2017

Author: Joe Leahy


Investors in Brazil exude complacency despite political risks

One of the best-performing emerging markets faces unpredictable presidential election Read next The Monday Interview Itaú Unibanco CEO readies for fintech battle The benchmark Ibovespa has gained nearly 28 per cent this year © AFP Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) 1 Save to myFT

OCTOBER 17, 2017 by Joe Leahy in São Paulo

When Jair Messias Bolsonaro, Brazil’s far-right politician, returned from a controversial grand tour of the US last week, he posted a giant “Thank you, USA!” graphic on his Facebook page. The former army captain-turned lawmaker is known for choice quotes, such as telling a fellow congresswoman he would not rape her because she did not “deserve it” and that the biggest mistake of Brazil’s former military dictatorship was to torture rather than kill its victims. With Brazil suffering from a political vacuum after a vast corruption investigation and two-year recession, Mr Bolsonaro was hoping his US trip might help him migrate from the fringe of national politics to the centre.  Essential stories related to this article Analysis Brazil economy Brazilians taste the first fruits of recovery Special Report Brazil economy Brazil: under a cloud of crisis beyondbrics Brazil’s Bolsonaro gets a little help from his critics on US tour It was also a timely reminder to investors who have been driving Brazil’s market up to record heights, with the benchmark Ibovespa gaining nearly 28 per cent this year, of the political risks that lie ahead for one of the world’s best-performing emerging markets. The country is facing one of the most unpredictable presidential elections in its history in October next year. Yet markets have been steadily lulled into complacency by a mixture of accommodating global liquidity conditions and a turnround in Brazil’s economy. This week the government of President Michel Temer, himself the product of political turbulence after he took power last year following the impeachment of his leftist predecessor, Dilma Rousseff, released on WhatsApp a chart showing the rebound. Inflation has fallen 6.8 percentage points since the start of the new government in April 2016, gross domestic product is expanding slightly after shrinking last year and the economy was adding jobs again. Bellwether stocks, such as state-owned oil company Petrobras, which was the centre of the corruption scandals, have cleaned up governance and their share prices have rebounded. After the spendthrift days of Ms Rousseff, when the budget deficit seemed out of control, Mr Temer’s government has sold investors a narrative of fiscal responsibility and market reforms in the oil, labour and other sectors. So good has the ride been that some investors are beginning to convince themselves that the next president, no matter who he or she is, will continue with the Temer reforms. This would certainly make great sense. After all, Mr Temer has not yet been able to deliver the most important thing, a constitutional amendment to overhaul Brazil’s generous pension system. Unless the average retirement age is extended from the mid-50s to the mid-60s within the next couple of years, pension and payroll spending will explode. But there are two problems with the market’s belief that a new more orthodox economic consensus will inevitably prevail. First, no one has the slightest clue who will be the next president. The rise of once peripheral figures such as Mr Bolsonaro shows the extent of the vacuum. Indeed, while it is still far too early to draw any conclusions, the top candidates in opinion polls for the presidential race are the former president and leftist firebrand Luiz Inácio Lula da Silva followed by Mr Bolsonaro. Most worrying for markets would be a return of an unrepentant Mr Lula da Silva. But he has been convicted for corruption and will be prevented from running if he loses an appeal against the ruling. Also, polls show more voters rejecting him than liking him. Mr Bolsonaro too would probably be seen by markets as too socially divisive to be a good president. Investors would be more comfortable with São Paulo mayor João Doria, a political newcomer who models himself on New York billionaire Michael Bloomberg, or his former political patron and now rival, the conservative São Paulo state governor Geraldo Alckmin. But Mr Doria is inexperienced and little known outside his home city. Mr Alckmin, meanwhile, is seen as old guard in an election in which voters are expected to reject the political establishment. These are just the known candidates — there scores of other names emerging, from bankers to television hosts and former supreme court judges, who could yet steal the show. The second problem is that Brazilians traditionally favour big governments and social benefits. Populist candidates promising to alleviate the recession through spending programmes could do well. On the other hand, candidates who talk about pension cuts and privatisations, could end up winning the markets but losing the election. Investors probably will not have to worry until after carnival in February next year, when the campaign will really get going. But they might do well to remember that Mr Bolsonaro’s middle name, “Messias”, translates as “Messiah”. While Brazilian voters are expected to be mature enough not to completely fall for a Messianic populist, fiscal and economic responsibility may prove to be a harder sell than many investors are expecting. Brazilian officials are confident the worst is over.



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