- Brazil has chosen a president with a radical-right profile and a liberal economic programme, who will govern from January 2019.
- The agenda that weighs most on markets is pension reform and the privatisation of state companies.
- His programme must go through a fragmented Congress, and real economic policy will depend on how he builds majorities.
On 28 October 2018 Jair Bolsonaro, candidate of the Social Liberal Party, won the runoff of Brazil’s presidential election with 55.13% of the vote against 44.87% for Fernando Haddad of the Workers’ Party. He takes office on 1 January 2019. The first round was held on 7 October.
Brazil is the largest economy in Latin America and a key market for several large Spanish companies, from banking to telecoms, energy and insurance. The election comes with an economy recovering slowly from the 2015 and 2016 recession, with high unemployment and rising public debt. The result comes after a deep recession, the corruption scandal known as Car Wash and a highly polarised political period, and the first market reactions have been without major shocks.
A liberal economic programme
Bolsonaro has defended the privatisation of state companies, less state intervention in the economy and spending cuts, with a liberal-trained economist, Paulo Guedes, as his main adviser. For investors, the central point is reform of the pension system, regarded as essential to repair public finances with a high deficit.
These proposals, however, are a programme and not a law. The president-elect will have to negotiate with a very fragmented Congress, with dozens of parties, and reforms such as pensions require qualified majorities. It is common for the distance between campaign promises and what gets approved to be considerable.
Risks and open questions
There are several doubts. The first is political: the country’s polarisation and the new president’s style may make consensus harder. The second is economic: how much real room there is to cut spending and how the privatisation of strategic companies will be arranged. The third is external: Brazil’s stance on trade and international agreements, including the negotiation between the European Union and Mercosur, open since 1999 and of interest to Spanish exporters of machinery, cars or wine, among others. The new Government will decide how much priority to give it.
For companies with Brazilian subsidiaries, and for some Spanish groups Brazil contributes a significant part of profits, the real’s exchange rate and the evolution of inflation and interest rates directly influence results converted into euros. A more stable environment usually favours investment, while any deviation in the reforms may reopen volatility.
What to review
Companies with business in Brazil can review their currency exposure and how it is hedged, contracts subject to concessions or public regulation and planned investments, to adjust them to different scenarios. It is worth following the first appointments to the Government and the legislative timetable. Contracts with Brazilian customers or partners may include price-revision, currency and dispute-resolution clauses that deserve a careful review.
Families or investors with funds that have weight in emerging markets can check how much Brazil represents in their portfolio and whether that weight fits their risk profile. This is general information and not an investment recommendation: decisions are best made with an adviser, with the specific situation in front of you.
An election victory opens a stage, but economic results will depend on what manages to be approved.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
