Post-Election Outlook in Brazil: Bolsonaro’s Next Steps

With Jair Bolsonaro’s election, Brazil avoided the worst-case scenario from a market’s perspective, the potential return of the Workers Party (Partido dos Trabalhadores; PT; the party of the impeached Dilma Rousseff and jailed Luiz Ignacio Lula da Silva) to power. Now, the question in our minds is what a Bolsonaro administration will really entail. There are many challenges ahead for the new president as the country is barely out of a recession and the fiscal deficit is among the highest in emerging markets (EM). In general, 2019 will be a tough year for Brazil with reforms and possible external pressure. With that said, we believe that Bolsonaro’s actions so far are leading Brazil in the right direction for now.

 

As a result, we have a positive stance on Brazil, focusing on the corporates we believe will benefit in the new administration. The clear winners should be the quasi-sovereigns, such as Petrobras and Banco do Brasil, that even if not privatized will have less government interference. Winners within the private sector should be companies dependent on the domestic market, including the local banks and infrastructure credits like Votorantim. Such credits will likely benefit from an increase in investor confidence. While exporters should continue to be more dependent on global demand, and a stronger BRL is a possible headwind, macro stability will also help them.

 

We are constantly monitoring the situation and here are some key topics that we are following closely:

 

 

 

 

Given Bolsonaro’s (admitted) lack of knowledge regarding economics, he has passed the reins over the economy to Paulo Guedes as his Minister of Finance. Guedes is a market-friendly University of Chicago economist. Although he is a bit academic and lacks political capital, he has put together a seemingly competent team, such as the recently announced Roberto Campos as the head of the Brazilian Central Bank (BCB), and Mansueto Almeida, who is remaining as Treasurer, providing some welcomed continuity. With that said, it will be important to follow Bolsonaro’s dynamic with his economic team as he manages the political impact of some liberalization policies.

 

 

Brazil is coming out of a strong recession and has a fiscal deficit problem. Therefore, a (well executed) pension reform will be key to reach fiscal stability. Bolsonaro has emphasized the importance of the fiscal balance, which is a good sign, but execution will not be straightforward. Some hoped that a reform would pass still in 2018, but this will now be a 2019 event. The question is what kind of bill will be proposed, and whether Bolsonaro has enough political capital to pass such a controversial, but important, reform.

 

 

These include making the BCB independent (expected to be a low-hanging fruit possibly addressed still in 2018) and possible privatization of quasi-sovereigns. The privatization would be more likely for certain assets, such as parts of Eletrobras, than others that are of strategic importance like Petrobras. Whether Bolsonaro will be able to pass certain changes will show his ability to govern.

 

 

 

Bolsonaro’s ability to pass bills through congress remains a question. Any change to the constitution, which the pension reform and other economic changes would require, needs to be passed by the Congress. Although Bolsonaro’s party (PSL) did well and gained many seats, there are still 30 parties in the Congress, and alliances are required to reach the threshold. Given the current structure of the Congress, it is definitely possible for bills to pass, but it will not be straightforward, and will depend on Bolsonaro’s ability to bring a coalition together.