By Isabelle Mateos y Lago
Far-right candidate Jair Bolsonaro won Brazil’s presidential election, reflecting the rise of anti-establishment politics globally. Isabelle and Axel Christensen weigh in on the investing implications.
Far-right populist Jair Bolsonaro has decisively won Brazil's presidential election, gaining popular support for his plans to push on with economic reforms and restore law and order in Latin America's largest economy. His win reflects the rise of anti-establishment politics globally-and comes on the heels of Andrés Manuel López Obrador's victory in Mexico's presidential election earlier in the year. We share what Brazil's election result means for investors in our BlackRock Bulletin Bolsonaro wins in Brazil.
Bolsonaro's win heralds big changes for Brazil, whose economy remains in a fragile state despite recovering from a 2015-2016 recession. Brazilian risk assets had rallied since Bolsonaro's polling prospects started improving ahead of the first round of the election. Yet we see the decisive victory by Bolsonaro - widely perceived as more market-friendly than his left-wing opponent Fernando Haddad - as largely priced in by financial markets. Further gains in Brazilian assets will hinge on the new government's success in pressing ahead with economic reforms, particularly of Brazil's bloated pension system, in our view.
Bolsonaro was a politically divisive figure during much of the campaign, but his economic team appears committed to building on the reform agenda put in place over the past two years. These reforms - which include spending curbs, privatizations and a loosening of labor market laws - have helped support a gradual economic recovery. Yet if Bolsonaro were to act in ways that damaged institutions, as some fear, this could pose longer-term risks to Brazil's growth.
Bolsonaro has promised to tackle Brazil's debt problem through pension reform, halving the number of government ministries, and extending privatization. A Bolsonaro administration would need congressional support to tackle such a reform agenda. Gaining such support will be no easy task given the 35 parties in Brazil's political system, but Bolsonaro's party had a stronger-than-expected showing in this election, becoming the second-largest party in the lower house. Cabinet appointments will be a key signpost of Bolsonaro's economic vision - in addition to a new central bank president. Brazil's central bank has been holding rates at a record low of 6.5%, with room to tighten in case of any inflation scares.
A growing debt burden, driven by massive social security obligations, is Brazil's key challenge. We see broad support for reforming social security. The president of Brazil's lower chamber has said he would bring a pension reform bill up for a vote if the new president-elect publicly supported it. A key focus for investors will be the net present value of fiscal savings from any future cuts to benefits.
Bolsonaro represents the right-wing Social Liberal Party and was seen as the favorite leading into the first-round election, where he captured the largest share of the vote. The populist and former military captain has tapped into widespread discontent with the status quo, but faced high individual disapproval levels due to his often provocative views. Haddad was the vice presidential candidate of popular (but jailed) politician Luiz Inácio Lula da Silva and replaced him on the ballot.
Brazil's longer-term prospects will depend on the new government's progress in tackling Brazil's debt dynamics. The conclusion of the Brazilian election marks the end of a string of contentious Latin American political matches. We remain risk-on and see the lifting of political clouds in emerging markets supporting the long-term case for EM assets.
This post originally appeared on the BlackRock Blog.