Brazil’s lurid political melodrama

Brazil is embroiled in a presidential election full of political melodrama.

Don't write off this vibrant country just yet

2009 Getty Images

"Brazil, land of the lurid telenovela" is embroiled in a presidential election "full of political melodrama", says The Times. The favourite is right-wing populist Jair Bolsonaro, known for throwing vitriol at Brazil's black communities, gays and women, and who is nostalgic about the days of military rule.

He secured a victory with almost 47% of the vote in the first-round of the presidential election last Sunday. But he fell short of the 50% required to win, which means there will be a run-off at the end of the month. The second-placed candidate is Fernando Haddad of the leftist Workers' Party, heir to charismatic former leftist president Lula, who is now behind bars.

Brazil blows the budget

What might all this mean for the economy? "We see more room for a constructive liberal reform agenda if Bolsonaro wins, but it could be difficult to get [it] off the ground," says Daniel Sinigaglia at Standard Chartered. The main problem is that public debt has risen from 60% to 84% of GDP in just four years, says Buttonwood in the Economist. "This owes a lot to a collapse in revenues after 2013. A brutal recession did not help." For many years the budget benefited from windfalls from a mining boom and credit-fuelled consumer spending, but "those will not be repeated". Spending cuts are needed. But both front-runners are polarising figures and might therefore struggle to steer reforms through congress.

Advertisement - Article continues below

Whoever emerges as Brazil's leader has to tackle not only crime and corruption, but also rampant inequality issues. It is one of the most polarised places in the world, as it suffers from what has been described as "Robin Hood in reverse".

A large portion of its public spending goes to people in the upper middle class rather than the poor. State pensions are the most pressing example an issue that will only grow as the population ages. A third of Brazil's tax revenues are spent on retirement, 53% of which is for the wealthiest 20% while only 2.5% is for the poorest fifth.

"The crunch point might be next August," Arthur Carvalho Filho of Morgan Stanley told the Economist. A budget for 2020 must be submitted then, and if it doesn't contain pension reform, a squeeze will be needed elsewhere. Otherwise the country's long-term public spending cap, written into the constitution a few years ago, will have to be lifted.

That could deal a fatal blow to global investors' confidence in Brazil, triggering an exodus from Brazilian assets. However, it would be a mistake "to write off this vibrant country as a failing state" just yet, as The Times points out. If the worst doesn't happen, then the long-term outlook is positive. Brazil's private sector "remains dynamic and its commitment to the rule of law is a model for the continent".




Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular


The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020

This chart pattern could be extraordinarily bullish for gold

The mother of all patterns is developing in the gold charts, says Dominic Frisby. And if everything plays out well, gold could hit a price that invest…
1 Jul 2020

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020