Luiz Inacio ‘Lula’ da Silva, the left-wing Worker’s Party candidate, has narrowly triumphed over incumbent Jair Bolsonaro in the Brazilian presidential election. Lula, who served as president from 2003 to 2010, won 50.9% of the vote in the runoff election on Sunday, and will take office on 1 January 2023.
Despite his victory, the market reaction has been cautious. The political hat that Lula chooses to wear when he enters office on 1 January will go a long way to dictating the reaction to his presidency, and what the implications will be for emerging market investors. J Stern & Co emerging market debt manager Charles Gelinet questioned whether Lula would be pragmatic, and follow the economic orthodoxy he did in his first term, or whether he would lean towards the policies of increased state intervention and spending that defined his second term.
Omotunde Lawal, head of emerging market corporate debt at Barings, said that she expected a more pragmatic, centrist approach from the president-elect, especially given the slim margin of victory, and the make-up of the lower house. Lawal noted that Lula’s closest bloc makes up 16% of the house, and includes the Workers’, Communist and Green parties. However, Bolsonaro’s Liberal Party, which consists of his loyalists and traditional ‘Centrao’ politicians, is larger, with a 19% share of the house.
Gelinet said that this political gridlock ought to make the introduction of any “aggressive economic agendas” difficult, thus limiting the immediate impact on Brazilian markets. He also cited recent legislation, such as the SOE Governance Law, as a barrier for any interventionist policies that Lula might try to enact. The legislation, which passed in 2016, sought to align practices with the private sector and disengage the economy from party politics.
However, with Deloitte’s Michael Wolf predicting the Brazilian economy to “slow dramatically” into next year, a return to the interventionist economic policy that Lula enacted during the global financial crisis ought not be ruled out. Mark Murray, a senior investment analyst at Morningstar, was also wary of this, noting that the potential risks of a left-wing victory need to be monitored, particularly with regards to the potential abolishment of constitutional caps on public spending and interference with fuel prices.
This lack of clarity is leading to uncertainty for markets, and the tight electoral margin and prospect of a contested result ensures the continuation of the political risk premium that was priced into markets in the run up to the election. Reuters even reported that London-listed Brazilian ETFs fell between 3.5% and 4% this morning. Until Bolsonaro officially concedes defeat, the market impact will remain uncertain.
