The Good, The Bad And The Ugly Of The Brazilian Presidential Candidates

Aug. 09, 2018 1:15 PM ETBanco do Brasil S.A. (BDORY), BRZU, EBR, EWZ, PBRBHP, CSAN, UGP, VALE, BA, ERJ, EWZS43 Comments
James Cherry profile picture
James Cherry


  • Business-friendly Presidential candidates seem likely to win the election.
  • Privatization of many state-owned entities seems very probable in the future.
  • Many possible scenarios for the Brazilian ETFs like EWZ, BRZU and EWZS.

The decision to write this article was because of a follower's comment on a previous series of articles that I wrote about the ETF NYSEARCA:EWZ. I am not a political science major, nor do I have any political training that qualifies me to be a political correspondent. My view towards government is fairly similar to those of the US Founding Fathers. That being said, I make it a point to keep myself well-informed, because the outcome of the Brazilian election will directly affect my life and my work. Since I am not a Brazilian citizen, I am not required to vote (voting is mandatory) and I do not have a preferred candidate or party.

A majority of my information comes from two sources, which are Valor Economico and the Uol political page. Valor Economico is my favorite news source, and I feel their articles are the least politically biased. Any other sources used will have a direct link to them in the article. Unfortunately, a majority of the articles used to write this article are in Portuguese. Also, I will only cover the economic proposals of each candidate. The voter poll that I am using is the CNT/MDA Poll. There are many polls to choose from, and I picked the one that I normally use in order to create common ground for this discussion.

I have written this article under the assumption that former President Lula will not be able to run for office. His party called the "Workers' Party," or "PT," is trying hard to force his candidacy because, in the event that he is elected, he will not have to serve his prison sentence (my opinion). Many Brazilian political analysts are sure that it is not possible for him to run due to the Operation Car Wash (Lava Jato) judicial proceedings. If, for some reason, he finds an obscure loophole in the system, I feel that his re-election would cause investors to totally lose faith in Brazil, and Brazilian indices will be good short targets.

Candidate Ciro Gomes

Ciro Gomes has held several positions in all levels of the Brazilian government. He was the state representative for Ceara, mayor of a major Brazilian city called Fortaleza, the Finance Minister, the Minister of National Integration (focuses on reducing regional inequality) and a Congressman. He is considered to be a center-left politician and is currently fourth in the Sao Paulo voter poll (w/o Lula).

In my opinion, his economic policies are not very market-friendly. He wants to fix the internal price of gasoline and publicly criticizes Petrobras (NYSE:PBR) and its profit margin of more than 3% (which he believes should be the max). His main goal is to prevent the internal gasoline prices from being affected by market speculation. Ciro also disagrees with the Embraer (ERJ) and Boeing (BA) deal, saying that it affects national security. He plans to fix this problem by adding a "golden share" into the deal. The belief that this deal will affect national security makes me believe that he is a little delusional or misinformed. FYI, Embraer still produces propeller fighter planes, while Boeing makes the Apache. Also, the Boeing/Embraer deal is for the purchase of the commercial jet unit, and I fail to see how this can affect national security. He also disagrees with the privatization of Eletrobras (NYSE:EBR) and wants to expropriate all the oil fields that were auctioned to foreigners during the era of President Temer.

Presidential candidate Ciro wants to make changes to the spending ceiling rule by removing infrastructure investment spending and adding other forms of public spending like social security. He is for implementing a state-level spending ceiling and a VAT tax system. Plus, he would like to increase taxes on dividends and inheritances. He also believes the states should pay taxes on financial instruments and they should contribute their share to social programs like Brazilian social security.

As for the country's debt, he plans to use the 200 billion USD in foreign currency reserves to reduce internal debt.

The only policy that I found interesting was that he wants to set a goal to invest at least 5% of GDP in infrastructure each year. The focus of this plan is to fight against deindustrialization, which, in theory, should create more blue-collar jobs.

Candidate Marina Silva

Presidential candidate Marina Silva is currently ranked third in the Sao Paulo voter poll (w/o Lula). She was a Senator and a Minister of the Ministry of the Environment (almost like the EPA). I feel it is important to mention that her role as a senator was on the Workers' Party (known as "PT") ticket, and the Minister position was given to her by PT and also during the Lula government. She claims to have cut all ties with PT and has made a couple of public stands against corruption. She also ran against former President Dilma, which leads me to further believe she has truly cut her ties with PT. Another important point is that she is a true environmentalist. I believe that this means she will be very strict on companies and their environmental actions.

Her economic policies seem to be a little bit more market-friendly than those of Ciro. Her view towards privatizations is a little more liberal, meaning that she is pro-privatization of EBR but against the privatization of PBR and Banco do Brasil (OTCPK:BDORY). She did criticize how PBR is currently passing the variations in gasoline prices to the consumers on a daily basis, and she believes that it should absorb some of the variations in the petroleum price.

Her economists have a negative view towards the spending ceiling law which was passed during the Michel Temer government. She understands its importance but disagrees with its rigor. Her economists also say that she is focused on creating a long-term sustainable fiscal system, and that she would like to increase the tax on inheritance. She is for simplifying the current tax system and the current labor laws, but is against reducing sales and income tax. The only tax reduction the Brazilian people could see under her government would be on medicine and on staple foods.

Saving the best for last, Presidential candidate Marina Silva supports the idea of the Central Bank being fully responsible for the monetary policy without political intervention. In my opinion, her view towards the role of the Central Bank is similar to the role of the Federal Reserve Bank.

Candidate Geraldo Alckmin

Presidential candidate Geraldo Alckmin has served in several roles in all levels of the Brazilian government. He served as a city councilman and as a mayor of the city Pindamonhangaba (a modest-sized city). He has also held the position of lieutenant governor and governor of the state of Sao Paulo. He is considered to be a pro-business centrist.

Presidential candidate Alckmin is an advocate for privatization of most state-owned organizations except PBR and Banco do Brazil. He would like to limit Petrobras's monopoly on oil exploration and distribution by selling off oil fields and the company's oil distribution unit.

Geraldo Alckmin would like to replace the several different types of sales taxes with a VAT tax system. His goal is to simplify the sales tax code and also reduce income tax on corporations. He believes that by doing so, the country will be able to stimulate new investments. He contradicts himself a little - because he defends the recent tax on dividends and the end of the tax benefit for investors of a special CD in Brazil but is against raising taxes.

He wants to reform the unemployment system with the goal of adjusting benefits with a long-term rate instead of the short-term inflation rate that is currently being used. Continuing the theme of benefits for the people, he has a lofty goal to double the income of the population but has yet to provide a timeline for this goal.

As for fiscal policy, his main goal is to reducing spending. He plans to do away with 10 ministries and reduce the number of senators from three to two per state. This, he believes, will greatly reduce spending. His economists state that he would also like to remove the constitutionality part of the spending ceiling rule. He understands the importance of the spending ceiling but believes that by being a part of the constitution, it takes away flexibility from the government.

Candidate Jair Bolsonaro

Presidential candidate Jair Bolsonaro is a former Military Officer and is known for his far-right and populist political views. He has been a city councilman and has served 7 terms as a Congressman. He appointed General Mourao to be his Vice President. He openly admits he will reduce the number of Ministers from 28 to 15 and will appoint some Generals to fill these roles, as he feels they are less corruptible. Due to comments like this, many people believe he is trying to secretly make a path for the return of the military dictatorship. I believe that he is not wanting to do this, because he constantly says he wants to reduce the role/size of the government. His current ranking is 1st in the Sao Paulo Poll (w/o Lula).

Privatization at a fast pace has been his battle cry. He claims to have a plan that will raise close to 700 billion reais through privatization. This plan will include the privatization of Petrobras. This money will then be used to pay down the debt, which will consequently reduce interest payments and total spending. He wants to drastically reduce spending, implement fiscal reform, and he is against an inheritance tax. In order to make up for the loss of tax revenue, he has a plan to increase revenues by incentivizing mineral exploration, stimulating tourism and increasing public safety.

With regard to PBR's gasoline pricing policy, he consistently contradicts himself. He says that he is a free market advocate, but then he says that Petrobras should not pass on price volatility to the end consumer on a daily basis.

Jair Bolsonaro does not seem to not be a big fan of China, as he specifically mentions them in this article from Estadao. In this article, he says that he plans to use the Golden Share to prevent partners like China from buying state organizations. The way the article reads, it makes it seem like this will be his go-to solution for mass privatization without risking national security.


In the unlikely event that candidate Ciro Gomes is elected, I feel that several past privatizations could be at risk of being expropriated. I do not feel that this candidate would be good for the market, and thankfully, he is ranked 4th in the Sao Paulo voter poll (w/o Lula). If he is elected, Business Confidence will most definitely shrink. Any long exposure to indices ETFs like EWZ and NYSEARCA:BRZU should either be reduced or should have downside protection (put options) if his probabilities of winning increases. The same advice should be applied to long exposure to the Brazilian real.

I feel that candidate Marina Silva will not disrupt any past or current privatizations done by her predecessors. Her environmentalist views might affect businesses that are not environmentally friendly. I believe that there is a high probability that she will implement more environmental regulations, if elected. Companies like Vale (VALE) and BHP Billiton (BHP) will need to be on their A-game because she will most definitely throw the book at them in the event of another disaster like the one in Minas Gerais. If she is elected, I would reduce my long exposure to Brazilian companies that are not environmentally friendly, though I would not short them. I feel that Business Confidence during her term will stay in the mid-fifties range.

Candidate Geraldo Alckmin has good chances to win, and he is second in the Sao Paulo poll (w/o Lula). If he is allowed to sell Petrobras's oil distribution unit, then companies like Cosan Ltd. (CZZ) and Ultrapar (UGP) should have better opportunities to profit from oil distribution. His policies should stimulate the economy and result in a slightly higher-than-average range in Business Confidence. The scenario that I see playing out is upon confirmation that he won the election, the main Brazilian Indices should increase.

Candidate Jair Bolsonaro has good chances to win, and he is leading the Sao Paulo poll (w/o Lula). Overall, his policies should be good for the market, but his manner and lack of a filter between his brain and his mouth will in no doubt cause an increase in market volatility. With that in mind, the best move for the faint of heart would be a volatility play via options (straddle or strangle). For those who are willing to take on more risk, go long Ibovespa after the sharp drop that I believe will occur when he is declared the winner (like what happened when Donald Trump got elected). Also, I would recommend increased exposure to state-owned companies like Petrobras and Eletrobras. If he is able to implement his tax program, I feel that Business Confidence will reach all-time highs (the seventies range).

All candidates mention Petrobras and its gasoline price policy. This is a subject that is making the headlines weekly, and investors should closely monitor this situation.

If history repeats itself, I feel that Jair Bolsonaro has a good chance to win the election. Brazil is still recovering from a large recession, and during a recovery period like this one, populist leaders tend to win elections.

CNT/MDA Poll Results

This poll is conducted jointly by two different companies, CNT and MDA, in the State of Sao Paulo and they interview over 2,000 people in 75 counties. It has a margin of error of 2.2% plus or minus. Jair Bolsonaro is leading the poll with 18.9%, and Geraldo Alckmin is in a close second place with 15%. Given the margin of error, it is possible that they are tied. Marina Silva is in third place with 8.4%, Fernando Haddad (might run in Lula's place) is fourth with 8.4% and in fifth place is Ciro Gomes, 6%. You might notice that I did not do an analysis for Fernando Haddad, but that was not an accident. There is still a lot of uncertainty inside the Workers' Party as to who will run for President. As the elections come closer, I will update this article with the most up-to-date information, so please "Follow" me on Seeking Alpha to receive this information and more.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

James Cherry profile picture
I am the Head of Content Strategy at Sproutfi, a fintech located in Brazil that is democratizing investing in Latin America.  I have over 13 years of experience in the Food Industry, ranging from plant engineer to Corporate Development and FP&A.You, the reader, will notice that most of my articles were written about investment ideas I was researching for my investments.My alma mater is the University of Arkansas, where I graduated with a BA and an MSc in Operations Management. I served in the United States Army for six years and was deployed several times, including in Iraq. After completing my military obligation, I moved to Brazil to begin my career in Finance. I received an MBA in International Business from FIA/FEA at the University of Sao Paulo. I have passed the Level 1 and Level 2 CFA Exams. My hobbies are: playing the guitar and drums, longboarding, mountain biking, scuba diving, reading non-fiction books, and giving financial advice to low-income households.Any article in Seeking Alpha reflects my opinion and not the opinion of Sproutfi.

Disclosure: I am/we are long EWZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no political affiliation to any Brazilian Political Parties nor will I ever initiate such an affiliation in the future.

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