The Good, The Bad And The Ugly Of The Brazilian Presidential Candidates Part 2

Includes: BRZU, EWZ
by: James Cherry

Recent gains for EWZ is a sign that the market is backing Jair Bolsonaro.

Some models show the probability of Jair Bolsonaro winning is 75%.

The market seems to care more about the Finance Minister than the actual candidate.

This article is a followup to my original article "The Good, The Bad And The Ugly Of The Brazilian Presidential Candidates." The goal behind this article is to update investors on the remaining two candidates. Jair Bolsonaro and Fernando Haddad will now spend the next couple of weeks battling each other in a no-holds-barred campaign to become Brazil's next President.

As I mentioned in my original article, I am not a political science major, nor do I have any political training that qualifies me to be a political correspondent. I am a resident of Brazil but I am not a Brazilian citizen which means that I do not vote. I also do not belong to any political party nor do I have a preferred candidate or party. Unfortunately, a majority of the articles I used to write this article are in Portuguese. Another important point is that I am analyzing the below candidates' policies at face value. I am not naive. I know that politicians promise the world.

About Fernando Haddad

Fernando Haddad, Ph.D. is a member of Brazil's Workers' Party (Partido dos Trabalhadores, PT) and has a Law Degree, Masters in Economics and a Ph.D. in Philosophy all from the University of Sao Paulo. He briefly worked at Unibanco (now a part of Banco Itau) as an Investment analyst but most of his career has been spent in the public sector. He was a consultant for an economics research institute and a political science professor, all at the University of Sao Paulo.

He has also served as the Chief of staff to the Finance and Economic Development Secretary for the city of Sau Paulo, as a special advisor to the Ministry of Planning, Budget, and Management and as the Minister of Education during the Lula and Dilma Administrations. In 2012, he became the Mayor of Sao Paulo and in 2016, lost the reelection to Joao Doria.

Source for the above paragraph was

Fernando Haddad's running mate is Manuela Pinto Viera d'Avila. Manuela is a member of the Communist Party of Brazil (Partido Comunista do Brasil, PC do B). PC do B and PT have been allies since 1989 and have been given federal level positions due to this alliance. Her declared profession is a Journalist though I could not find a reference showing that she actually worked as a Journalist.

On Wikipedia, I found that she has served in many public positions including being the youngest city councilor in the history of Porto Alegre. She also served two terms as a congresswoman and one term as a state representative prior to becoming Haddad's running mate.

Fernando Haddad has yet to name who he will choose to be his Finance Minister. This position is a very important position because it can be used as a leading indicator of future economic policies for the country. I will go as far as saying that who a candidate picks to occupy this position could cause him to win or lose a close presidential race. In a recent article from Reuters, it says that he would not be hiring a banker, he might hire an economist or a business leader but not a banker. He also said that the person would be "the polar opposite" of Paulo Guedes, Jair Bolsonaro's pick for Finance Minister.

Brief Overview Of Fernando Haddad's Economic Policies

Candidate Haddad has plans to implement an Emergency job creation program. In this program, he plans to resume unfinished government projects (about R$120 billion reais worth of projects), resume investments in Petrobras (NYSE:PBR) and in the federal housing program (minha casa, minha vida). This program will also create a special line of credit for low-income families that have bad credit scores.

The candidate also plans to revoke recent labor law changes that were passed during the Temer Administration. The main points to be revoked are companies' ability to outsource or subcontract out internal positions and sealing access to the Labor courts. Let me further explain these two points in how I understand them. After the labor law changes implemented by President Temer, companies began subcontracting out the key functions of the company.

So a finance director of a company could actually be a financial consultant who has his own company and who occupies the role of finance director. What does it mean to seal access to Labor courts? The new labor law states that if an employee leaves a company or is fired and he/she signs the dismissal documents, they can no longer sue the company. He wants it to go back to the old way where an employee can sue the company for up to five years after leaving the company.

Candidate Haddad has a plan to increase the amount of public and private institution partnerships. At the same time, he wants to create a new regulatory agency to regulate social media. He also has mentioned that he would like to reevaluate Petrobras' fuel pricing policy.

Source for the Overview of economic policies: Valor Economico

About Candidate Jair Bolsonaro

Presidential candidate Jair Bolsonaro is a former Military Officer and is known for his far-right and populist political views. In 1977, he graduated from Agulhas Negras Military Academy, which is Brazil's most prestigious military university. He served in the Brazilian Army from 1971 until 1988 when he left at the rank of Capitan. He has been a city councilman and has served 7 terms as a Congressman. He appointed General Hamilton Mourao to be his Vice President and is inviting Paulo Roberto Nunes Guedes to be the Finance Minister.

Source for above paragraph was

Vice President hopeful Hamilton Mourao studied at Agulhas Negras Military Academy and graduated in 1975. He served in the Brazilian Army from 1969 until 2018 when he retired as a General. He is a member of the Brazilian Labor Renewal Party (Partido Renovador Trabalhista Brasileiro, PRTB).

The proposed Finance Minister in the event that Bolsonaro is elected would be Paulo Roberto Nunes Guedes Ph.D. Mr. Paulo Guedes has a Bachelors and Masters degree in Economics from the prestigious university Fundação Getúlio Vargas (FGV). In 1977, he received his M.Sc. in Economics and in 1979 his Ph.D. all from the University of Chicago. He has been a Board member, Founding Partner and CEO of many distinguished Brazilian Financial and Educational Institutions. If you would like to see all of them, please click the source link in this paragraph.

Presidential Candidate Jair Bolsonaro has mentioned some big names to run state-owned enterprises and hold government positions. One name that stood out today was Alexandre Bettamio who is the President of Bank of America in Latin America.

Brief Overview Of Jair Bolsonaro's Economic Policies

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. 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. A majority of these privatizations will be done using a Golden Share to protect national security. This plan will include the privatization of Petrobras.

With these funds, the government will pay down its 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 regards to PBR's gasoline pricing policy, he has contradicted himself a couple of times. 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.

Source for the Overview of economic policies: Valor Economico

What Is Said Around The Water Cooler?

Since I am an American, I cannot vote, and I am a curious person, I asked various people from various social classes about their thoughts on each candidate. This analysis probably has a huge margin of error but I would like for you to know what I hear here in Brazil. There are no sources for the two paragraphs below and I would treat it as an opinion or hearsay.

For Candidate Bolsonaro, I have heard the following opinions. He has been a politician for so long, what has he done until now and what makes us think he will be different than any other politician. He is ex-military and his vice president will be a retired Army General and we are scared of a return to a military dictatorship. Bolsonaro does not believe in equal rights.

Now for Haddad, this is what I have heard. He will be another puppet for Lula and the Workers' Party. He was the worst mayor in Brazil (fact: he ended his term of mayor in Sao Paulo with a 14% approval rating), how can I expect him to be a good President. He will set free all of his friends that are in prison because of Operation Car Wash.

A negative opinion directed at both candidates is basically the same I have heard many times during the presidential elections in the U.S., which is we have to pick the better of the worst.

I will reiterate my message above. There are no sources for the two paragraphs above and I would treat it as an opinion or hearsay.


In my original article, I suggested that the market's reaction to Bolsonaro winning would be a large drop in the major Brazilian Indices followed by a gradual increase to new highs months later. I also believed that the Brazilian Real would depreciate but it would eventually move back to its R$3.20 range. I now believe differently because of one reason, Paulo Guedes. Mr. Guedes is very well known by the market and so are his economic policies.

My belief is that this week the market will continue working on their models in order to price in the large probability of Bolsonaro winning and the small probability of Haddad. Though the Real has strengthened a lot against the US Dollar the past two days, I agree with Mr. Monty Guild Jr who feels it will reach R$ 3.40 in the next couple of months and the Real's volatility will also continue to decline.

All that being said, what will happen if Haddad wins? It is logical to think that the economy will continue down the same path of the past four Workers Party presidential wins. I do not feel that the market will react positively to this news. The probability of Haddad winning is 25%.

Disclosure: I am/we are long EWZ, BRZU. 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.