Previous Quarterly Editions
Expropriation Risk: 44 46 46 48 Political Violence Risk: 53 50 54 59 Terrorism Risk: 33 35 38 38 Exchange Transfer and Trade Sanction Risk: 45 45 45 45 Sovereign Default Risk: 52 50 50 50
TREND ▲ OUTLOOK ▲
While the victory of Jair Bolsonaro in the first round of the presidential election was initially unforeseen, when campaigning officially started in mid-August it was clear that the country’s upcoming elections would be the most unpredictable in thirty years. During October, Brazilians were asked to vote for a new president, the entire Lower House of the federal Congress and two-thirds of the Senate, as well as the governors of all 26 states and the federal district, and all the state deputies in regional legislatures. At the outset of campaigning, five candidates for a presidency covering a spectrum from the far-right to the centre-left stood a chance of reaching the second-round runoff. Former president Luiz Inacio Lula da Silva began a prison sentence for corruption in April but remains the most popular figure in Brazilian politics and would have been the Worker’s Party (PT) Candidate had he not been prevented from standing by country’s highest electoral court.
This left his running mate, former Sao Paulo Mayor Fernando Haddad, to stand in for him but with little time to persuade voters who identify closely with Lula as an individual to get behind the relatively lacklustre Haddad. Some of Lula’s support, particularly in the poorer north-east region of the country, were instead attracted by the anti-system, populist stance of Bolsonaro, a far-right congressman from the Social Liberal Party (PSL). A retired army officer who has defended the military regime that ruled the country between 1964 and 1985, he was known at the outset of the campaign for his extreme nationalism, social conservatism, and outspoken attacks on minorities.
When he was attacked while campaigning in early September, his support surged. In Lula’s absence, the political centre-left was represented by Ciro Gomes, of the Democratic Labour Party (PDT). However, a deal between the PT and the Socialist Party (PSB) meant that Gomes did not get the PSB’s share of free TV and radio air time during the final weeks of the campaign. Since the free time each candidate enjoys depends on the number of members in the Lower House who back their candidacy, Gomes was left with the very limited time granted by the PDT’s small representation. Although advertising on traditional free-to-air broadcasts is less powerful in the age of social media and cable channels, it is expected to remain an important means of reaching older, less affluent voters. Left-leaning former environment minister Marina Silva faced a similar problem as she was also running for a small party that had not built a significant alliance in the Lower House.
There was also uncertainty on the right, where Bolsonaro proved able to draw votes from centre-right former Sao Paulo state governor Geraldo Alckmin, of the Social Democrats (PSDB), especially after stepping up his anti-corruption rhetoric when charges were brought against both Alckmin and Haddad after the start of official campaigning.
Although Alckmin built a collation of small and medium-sized parties that assured him considerable free broadcast time, he received only 5% of the first-round vote. Elections for other tiers of government echoed the rightward shift seen at the presidential level but Bolsonaro, who was declared the winner with over 50% of the popular vote, will be forced to build a coalition as soon as possible once in office.
The trade conflict between the United States and China may provide short- to medium-term gains for some Brazilian exporters, such as soybean growers. However, even the agricultural sector in Brazil is expecting negative consequences as Washington increases subsidies for its own farmers to offset their losses from retaliatory Chinese tariffs, as this could make US products more competitive in markets to which Brazil also exports.
As trade wars hit global growth, Brazilian exports in general could suffer, along with levels of foreign direct investment. Investors are also concerned about the extent to which radical politicians have made inroads into mainstream politics during the elections, as this has made policy outcomes more unpredictable.
Bolsonaro’s late surge in the presidential campaign produced major demonstrations against his candidacy. While these were largely peaceful, by taking his campaign further to the right in the weeks before the second round vote, he has the potential to inflame sentiments to an exceptional degree. As Brazil relies heavily on road transport, the ten-day strike by truckers in May brought much of the country to a halt. Its success has increased the chance of further strikes, together with the related possibility of clashes with security forces.
TREND ► OUTLOOK ►
Brazil has not been a target for international terrorist groups, although its porous border makes it a potential haven for narcotics trafficking. While not resulting from a traditional terrorist threat, urban violence is a major problem and the federal government earlier this year put the military in charge of citizen security in Rio de Janeiro.
With almost 60,000 murders in 2017, Brazil is among the most violent countries in the world.
The central bank has maintained its benchmark Selic interest rate at a historic low of 6.5% since March. With weak growth and moderate inflation that remains firmly within its target band, the rate should remain unchanged in the coming months. Yet a record low Selic rate is proving of little help to businesses and consumers seeking credit, as banks normally charge much higher rates.
TREND ► OUTLOOK ▲
The economy continues to splutter and the country is on track to reach its fifth consecutive year with a primary deficit. The next government will struggle to achieve crucial savings from cuts in pensions that the outgoing president promised and then abandoned. This does not mean that a sovereign default is likely in the foreseeable future, even though the debt to GDP ratio is close to 75%, as the vast majority of debt is denominated in local currency. However, the country is on a fiscally unsustainable path and the political system does not seem able to change course.
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