The right around President Jair Bolsonaro experienced a landslide victory in the first round of the election, but ex-President Lula is continuing to lead – but now the stock market is cheering and the real is increasing. Why?
Investors are banking on President Lula, but want him controlled by a conservative Congress.
When the stock exchanges and financial markets in Brazil opened after Sunday’s elections, they made a big jump for the first time: the stock market index rose by 6 percent. The shares of state-owned companies in particular experienced unexpected price gains. Such as the oil company Petrobras and Banco do Brasil, but above all companies that are controlled by states, such as the electricity company Cemig (+11 percent) or the water suppliers Sabesp (+17 percent) and Copasa (+19 percent).
In the general election, President Jair Bolsonaro’s right experienced a nationwide landslide victory in Congress and the constituent states. But in the elections for the presidency held at the same time, ex-president Luiz Inácio Lula da Silva continued to lead by far ahead of the incumbent Bolsonaro – even if he was 5 percentage points far lower than the polls had expected. Runoff elections are on October 30th.
Risk premiums for Brazil continue to fall
The financial markets also reacted positively to the result: the dollar lost 4 percent against the real. This is the strongest devaluation since 2018. The risk premiums on Brazilian bonds fell below 300 points – in Brazil, the only emerging market in the world, they have fallen significantly this year. That means investors are charging less than a 3 percent interest rate premium (compared to US bonds) when they buy Brazilian bonds.
Or in other words: Investors have more confidence in the next government than before in pursuing sensible policies for the economy and the national budget. Investment banks like JP Morgan expect that the good mood on the financial markets could continue.
For many reasons. For example, Marcos Casarin of Oxford Economics believes that this likely combination of a charismatic, progressive leader – by which he means Lula – and a conservative Congress represents almost a best-case scenario for the markets.
Investors are pleased that on the one hand a President Lula could end Brazil’s isolation in the world and make the country socially acceptable again – after the right-wing populist Jair Bolsonaro, who with his environmental destruction in the Amazon region, the insults of European politicians and his demonstrative friendly ties with Putin in the West largely is isolated.
Lula could reopen the clogged financial channels
Lula could also quickly open up the clogged sources of finance abroad. Environmental aid, but also capital for infrastructure projects from pension funds and multilateral donors such as the World Bank could flow to Brazil much more easily again. In addition, corporations do not have to justify themselves to their shareholders or customers if they want to invest in Brazil or buy products from there.
On the other hand, with the conservative Congress and many member states in the hands of Bolsonaro confidants, Lula has been put in charge of powerful controllers: he has to negotiate, form coalitions and cannot simply govern. A revision of the labor legislation or the privatization of the state-owned electricity company Eletrobras, as Lula has repeatedly mentioned in recent months, now have no chance. According to JP Morgan, a left-wing government should not have as many degrees of freedom and would probably have to moderate the economic agenda.
So Lula didn’t get the blank check for his government he had hoped for with what the polls suggested was a possible first-round win. Now he will have to make concessions to the political center and the economy in order to win votes. He may introduce an economic cabinet to build trust among entrepreneurs. His economic program has also been very vague so far. In short: Lula now has to do his homework for the economy.
Bolsonaro confidants can continue to privatize
Investors are also positive that in states such as São Paulo or Minas Gerais, Bolsonaro’s confidants in the governor’s seats could enable further privatizations or capital increases of state-owned companies. For ideological reasons, that would hardly exist under governments of the Partido dos Trabalhadores. Numerous shares in state-owned companies are now benefiting from this.
Nevertheless, from the point of view of the economy, a worst-case scenario has also come closer. According to Oxford Economics, that would be a victory for Bolsonaro. “Bolsonaro’s growing support in Congress could allow him to fire Supreme Court justices, so he could potentially dissolve Congress and call free elections if he wanted to,” Casarin said.
In four weeks, investors will see more clearly.