Brazil: Between hope and caution

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10/21/2018 | 06:03 pm
With the second round of the presidential elections scheduled for the 28th of October, Brazil is gearing up for a runoff between far-right candidate Jair Bolsonaro on the one hand and leftist Fernando Haddad on the other.

Brazil is the world’s fifth biggest country in terms of its size and population. The country also remains in the top 10 world economies. And yet, when we look at the Latin American country, we see a growth cycle that’s characterized by quite a few cracks. The end of the uninterrupted growth cycle encountered a blockage in 2015 in the form of two years of severe recession - only to return in the green in 2017 but not enough to make up for the growth deficit.  

In fact, Brazil is recovering very slowly from the severe crisis of 2015 and 2016. The country has experienced a real trauma with a decline in its GDP of respectively 3.8% and 3.6%. This economic crisis also led to a political crisis with the impeachment of Dima Rousseff in 2016. We’re still far away from the booming decade of the 2000s where the growth rate reached 4/5% with a peak of 7.5% in 2010. The latter mainly was the result of some very generous income distribution measures, a policy that was supported by the rising commodity prices (agriculture and base metals), the part of the economy that represents more than 60% of the country’s export.

According to the IMF, Brazil’s GDP could improve by 1.4% but the difficulties lie in the deficit with its debt that affects 80% of the national wealth. It’s on this major point that the markets decided to make Jair Bolsonaro their favorite for the presidential elections. The candidate puts his efforts into the intensification of austerity measures, unlike his opponent Fernando Haddad, a stand-in for jailed ex-President Lula. Haddad wants to implement a more social policy in order to satisfy the country’s needs.

Brazil has thus just come out of an election campaign that has mainly been dominated by themes such as corruption, security, privatizations, and the environment. 

The Brazilian stock market has manifested itself positively about Bolsonaro with a significant increase of 16% for the past month. Investors have, by the way, never really abandoned the Brazilian stocks. If we take a look at the Ibovespa - we see that the index is currently in its third year of consecutive increases with valuations that have doubled.

The evolution of the Ibovespa over the past year.

Traders have since a few weeks reacted in a similar way with regards to the currency. The Brazilian real has made up more than 4% of its significant fall since the beginning of 2018 (-20%).  

The evolution of the BRL/USD.

Furthermore, with the aging population, the financing of the country’s pensions file remains a highly relevant topic. Here too, the opposition is fierce. The investor’s favorite, the ‘Brazilian Trump’, proposes a program that’s credible for creditors, centered around lowering the national debt thanks to a reduction of the deficit, a pension reform and a return to privatization. On top of that, he wants to fight corruption. The leftist candidate, on the other hand, doesn’t want to make any profound changes, the return of the growth should be enough to make the current system sustainable.   

The positive attitude from the markets could be in for a momentary pause when the actual implementation of the program by the future President will be addressed. Because whomever this will be, he’ll have to form a stable coalition inside the Parliament. Meanwhile, the Brazilian society hopes for more transparency and more regulation to form a solid base for a sustainable and less chaotic growth.  

Neelie Verlinden
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