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Markets have reacted positively to Jair Bolsonaro's lead, but it reflects more relief that left-wing Fernando Haddad is losing traction than certainty that he will back a pro-business agenda, IHS says.  (Photo: Bolsonaro.com.br)
Wednesday, October 17, 2018
Trade Talk

Brazil Election: No Silver Bullet


Brazil's next president may not be that pro-business, experts warn. 

BY LATINVEX STAFF

Brazil faces a clear risk of policy reversal affecting recent legal and regulatory changes improving the country's business environment after the October 28 presidential elections, warns Carlos Caicedo, Associate Director for Latin America Country Risk at IHS Markit.

There is also greater risk of failure to complete essential changes to the country's pension system and to reduce its fiscal deficit,” he says in a commentary.

The two candidates facing off are Jairo Bolsonaro from the Social Liberal Party (PSL) and Fernando Haddad from the Workers Party (PT). Bolsonaro maintained a wide lead over his leftist rival Fernando Haddad in the second election poll looking at voter intentions for the Oct. 28 run-off vote, according to a survey published on Monday, Reuters reports. 

MIXED SIGNALS

Although many local and foreign investors and traders are hoping Bolsonaro wins, IHS warns against the dangers of a Bolsonaro administration.

“Bolsonaro has indicated that he supports austerity, but his stance on pension reform is unclear, while his backing of the privatization of important state-run companies appears unlikely,” Caicedo says. “Markets have reacted positively to Bolsonaro's lead, but it reflects more relief that left-wing Haddad is losing traction than certainty that Bolsonaro as Brazil's new president will back a pro-business agenda.”

Bolsonaro has been sending mixed signals; he has committed to austerity but failed thus far to come up with a credible plan for the critically important pension reform; he has also ruled out the privatization of state oil company Petrobras and Brazil's largest utility company Eletrobras, Caicedo points out.

“This is contrary to his advisers' initial claim that he supported privatization across the board,” he says.

Nationalistic and free market advisers to Bolsonoro are deeply split about the future of Petrobras, foreshadowing a showdown over divestments and fuel subsidies, Reuters reported last week.

Meanwhile, shares of Brazil's state power company Eletrobras tumbled 13 percent on October 10 after presidential front runner Jair Bolsonaro said he was unwilling to sell generation assets, suggesting he is against the full privatization of the company, in part because of his opposition against Chinese investments, Reuters reported.

THE HADDAD OPTION

Meanwhile, Haddad espouses the left-wing policies of the PT, which make no emphasis on austerity but rather on using public investment to revive the economy.

“He has also said that, if elected, he would ask Congress to vote a constitutional amendment to remove the spending cap introduced by the Temer government,” Caicedo says. “Regarding the tax reforms, he is proposing to increase income taxes for high-income earners and new levies on profits, dividends, and financial transactions. He also opposes privatization.” 


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