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A right-of-center dominated congress is likely to limit the scope for tax increases or large expansion of unfunded spending; but also to show limited appetite for major reforms.  (Photo of Congress courtesy of Senado Federal)
Wednesday, October 5, 2022

Brazil Vote: Bolsonarismo Gets a Booster Shot

Whoever is elected will have to build multi-party coalitions with several centrist parties.


Voters in Brazil went to the polls on Oct 2 to pick a president, renew all 513 Lower House seats and one-third of the Senate (27 of 81), and elect 27 state governors and state legislatures.

Left-wing former president Luiz Inacio Lula da Silva (PT) secured 48.4% of the valid votes, broadly in line with the poll-of-polls indication. Running for reelection, President Jair Bolsonaro (PL) secured a higher than expected 43.2% of the valid votes; roughly 4-5 percentage points above the poll-of-polls prediction. 

The presidential election will be settled in a likely competitive second-round runoff on October 30.

Out of the legislative and local elections there emerged a more polarized, conservative, right-leaning political map.

Pro-Bolsonaro and right-of-center candidates pulled off a few high-profile surprises and overall performed significantly better than expected in both gubernatorial and House/Senate races. Vice-President Hamilton Mourão (Republicanos), former federal judge and Justice Minister Sergio Moro (União Brasil), and several other ministers in the Bolsonaro administration won Senate seats. To a significant extent, even if president Bolsonaro ends up losing the runoff, Bolsonarismo as a political philosophy and identity gained deeper roots in this election.

Left-wing former president Lula da Silva (PT) secured 48.4% of the valid votes, broadly in line with the poll-of-polls indication. Running for reelection, President Jair Bolsonaro (PL) secured a higher than expected 43.2% of the valid votes; roughly 4-5 percentage points above the poll-of-polls prediction. President Bolsonaro performed better than expected in the three largest states: São Paulo, Minas Gerais, and Rio de Janeiro.

Further down the field, center-left Ciro Gomes (PDT; 3.0%) and center-right Simone Tebet (MDB; 4.2%) trailed the top two candidates by a large margin and underperformed pre-election polls, Ciro Gomes in particular. The two candidates were not able to break the deep ideological polarization that characterizes the current election, but their endorsement may be key for the Oct 30 second-round runoff.

President Bolsonaro’s PL will be the largest party in the House (99 seats, up from 77 currently), followed by the PT (68 seats, up from 56 currently). The PT/PCdoB/PV party federation will control 80 seats in the House and 9 in the Senate. Mr. Bolsonaro’s core political parties supporting his reelection (PL, PP and Republicanos) elected 187 House legislators (over one-third of the Lower House) and 23 senators (28% of the Senate’s seats) (The PL will also be the largest party in the Senate with 13 of the 81 seats.)

Overall, the bi-cameral congress became less fragmented, more conservative but also more polarized: there are now larger left- and right-wing benches, to the detriment of centrist parties. In many instances the newly elected legislators have a stronger ideological profile/identification, particularly on the right, which could lead to a more combative, questioning and oppositional congress in the event of a second-round victory by former president Lula.

New Lower House Map: Conservative, Polarized and Center-Right Leaning

The election generated limited renewal in Congress (slightly above 42%) but given the changes in the relative size of individual political parties and the profile of many new lawmakers, the overall assessment is that the Lower House will become a more conservative, and a more polarized chamber given the gain in representation by both left- and right-wing parties.

The Lower House will become less fragmented than that which emerged from the 2018 election, given recent changes in party representation and campaign financing rules. There will now be 23 political parties in the House (versus 30 in 2018); or just 19 political blocs when considering the registered federations of parties. In the Senate, the number of political parties dropped to 15 (down from 21 in 2018).

Leftist political parties elected a slightly larger Lower House bench, driven to a significant extent by former president Lula’s performance in the presidential race. But the House will continue to have a sizeable centrist representation and overall will lean right. The Workers Party (PT) of former president Lula saw its Lower House bench increase from 56 to 68 lawmakers. The core group of left-wing parties gained representation (+16 seats to 94) but that was broadly offset by the loss of representation of center-left (-16 seats to 45). Overall, left-of-center parties will control just 139 seats (unchanged from pre-election).

President Bolsonaro’s PL, Republicanos and PP core political parties elected 187 lawmakers (over one-third of the Lower House), and Mr. Bolsonaro’s own PL party elected the largest bench: 99 seats, the strongest performance by a single party since 1998.

If elected, former president Lula would have to reach out to centrist parties to form a governing coalition, and even to some center-right parties to approve constitutional amendments. Leftist and center-left parties together will control just 27% of the House seats. This implies that if elected, Lula will have to co-opt centrist parties to govern since the political left in the House will be around 120 seats shy of the votes needed for a simple majority vote. If elected, we expect Lula to secure support from a significant part of the MDB and PSD parties, segments of the PSDB/Cidadania, and potentially even parties to are currently supporting President Bolsonaro’s reelection bid (PL-PP-Republicanos).

Less Fragmented and Right-Leaning Senate

The Senate renewed one-third of its seats: 27 of the 81 Senators. Of the 27 Senators whose term ended, 14 sought reelection (but only 5 were reelected); the remaining 13 did not run or pursued other elected offices. Party fragmentation in the Senate declined slightly: 15 different political parties ended up with representation in the Senate, with a clear tilt in the overall composition towards right-wing and right-of-center parties.

Only four parties, all center and center-right, managed to elect benches with more than 10 senators (PL, PSD, MDB, and União Brasil). The main winner was President Bolsonaro’s PL party: it elected 8 of the 27 seats in dispute and saw its overall Senate bench grow to 13 (from 7). The PL-PP-Republicanos coalition supporting Mr. Bolsonaro’s reelection elected 23 senators (28% of the Senate). Vice-President Hamilton Mourão (Republicanos), former federal judge and Justice Minister Sergio Moro (União Brasil), and several other ministers in the Bolsonaro administration won Senate seats.

All in, the bi-cameral congress became more polarized and overall more conservative and leaning right-of-center. This, local commentators and political analysts believe, may limit the scope for potentially more extreme and heterodox policies. Going forward, we expect legislative activity to be highly influenced by the ideologically diffuse and in most instances non-dogmatic (in terms of policy) centrist parties. The centrist parties are also not particularly cohesive, in most cases their lawmakers do not have a well-defined ideological profile and within most parties there are significant divisions and left-right heterogeneity.

Ultimately, whoever is elected, whether Jair Bolsonaro or Lula da Silva, will have to build multi-party coalitions with several centrist parties; reaching the two-thirds qualified majority to approve constitutional amendments is a tall order requiring significant political capital and negotiating skill. In exchange for political support, the centrist parties will likely demand representation in the cabinet, access to and control of budgetary resources, and senior seats in regulatory agencies and SOEs. The centrist parties will likely set some policy limits (checks and balances) and the next president is likely to be dealing with one of the most autonomous and independent legislatures in decades. A right-of-center dominated congress is likely to, for instance, limit the scope for tax increases or very large expansion of unfunded permanent spending commitments; but also to show limited appetite for major reforms. Hence, coalition management will be key for the next president, as a multi-party broad political support base in Congress may turn out to be not particularly reliable or stable.

Off to the Runoff Race!

Given the tighter than expected first-round Lula-Bolsonaro spread (+5.2pt vs. double digits in pre-election polls) and visibly stronger than expected support for President Bolsonaro than what polls were predicting, Mr. Bolsonaro’s political and social base will likely be more energized and mobilized for the home stretch of the campaign. The still solid performance of the economy and labor market, a string of negative inflation prints, and the continuation of large fiscal transfers to households should also help the president in his quest for reelection. While the runoff is shaping as a competitive race, this is still a very challenging election for President Bolsonaro given that former president Lula ended within striking distance of a first-round victory (48.4% of the valid vote and 6.2 million votes ahead of President Bolsonaro) and the records of prior elections show that the leading candidate in the first round has tended to win the ensuing runoff.

All in, assuming no change in the overall abstention and regional abstention patterns and that the two candidates do not lose any of the votes gathered in the first round, former president Lula would need to encourage roughly 20% of the 8.4% (9.9mn votes) that supported other candidates to win the election. Finally, we highlight that the rate of abstention tends to increase from the first round to the runoff, though that may not be very significant this time around given that the abstention rate was already higher than in previous elections and the race is very polarized (third-way candidates got a small share of the valid vote).

In the coming weeks, investors should monitor public statements by the top candidates that did not make it to the runoff and elected governors for hints of whom they will formally or informally support/endorse in the runoff. In this regard, we highlight the formal endorsement by President Bolsonaro of the reelected governors of Minas Gerais and Rio de Janeiro. On the other side, the expectation is that candidates Ciro Gomes and Simone Tebet will end up endorsing formal president Lula (though it is not altogether clear whether their voters will follow their lead). Polls show that the majority of Ciro Gomes’s supporters are inclined to vote for former president Lula in the runoff (though most of Ciro’s early support may already have migrated to former president Lula in the first round); while those for Simone Tebet may be roughly evenly split. Support from key traditional parties, PSDB and MDB, may split across the different states.

Overall, following the post first-round asset price rally, market and asset price direction will likely be a function of the signals from runoff polls, whether former president Lula shifts his campaign and policy platform more to the center, and policy statements, particularly from former president Lula with regards to key cabinet posts (for investors, first and foremost would be who would lead the Ministry of Finance) and a more precise outline for the still loosely formulated main policy proposals, such as the tax reform, the new fiscal anchor to replace the constitutional spending ceiling, and potential changes to the labor reform. In a previous publication we outlined in broad terms the key features of the macro outlook under a Bolsonaro second-term and under a Lula administration.

The two candidates disputing the runoff are two well-Known Knowns: hence, the scope for a major post-election macro policy or political surprise is mostly perceived as limited. But they are also polarizing Known Knowns, to whom few are indifferent, as in highly stylized terms, they are loved by their core bases and loathed by others. Now it is the time for voters to decide.

Alberto Ramos is chief Latin American economist at Goldman Sachs Group. Renan Muta is Macroeconomic Research Analyst at Goldman Sachs.

This article is based on a client note by Goldman Sachs. Republished with permission.



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