Capital Ideas^TM

Below are some takeaways by Capital Group’s emerging market sovereign debt analyst Thomas Kontchou on important economic and policy considerations given the leftist candidate Luiz Inácio Lula da Silva’s victory in Brazil’s presidential election.

The leftist Workers’ Party candidate Luiz Inácio Lula da Silva was elected 50.9% to 49.1% over Jair Bolsonaro of the right-wing conservative Social Liberal Party in what was the closest result in modern Brazilian history.

While Bolsonaro did not make a concession speech on Monday, Brazilian assets were generally stronger following the 30 October results, with the Brazilian real up 2.3%.

Lula won by a narrow margin of about 2 million votes, but one large enough to appear decisive. Both heads of the Brazilian Congress, as well as world leaders, acknowledged the election results in short order. Bolsonaro supporters, in particular truckers in southern states, have blocked roads and highways to protest what they deem a stolen election, but the leaders of the truckers’ unions are distancing themselves from the protesters and the blockages. High-ranking military officials ruled out any military intervention in favour of Bolsonaro.

The close result confirms both a fiercely fought election and how the public viewed both Bolsonaro and Lula as flawed candidates: Bolsonaro for his poor handling of COVID-19 and inflammatory rhetoric; and Lula for his history of scandals and the legacy of the 2014–2015 economic crisis that occurred under the watch of his hand-picked successor Dilma Rousseff.

An orderly transfer of power cuts off potential left-tail outcomes of a contested election or attempted coup, but uncertainty remains high as Lula has not enumerated a cabinet or his priorities. I suspect that Lula will have a short honeymoon period before fiscal sustainability fears rematerialise.

Lula did publish a nine-page open letter outlining his policies last week. They are generally expansionary (more public infrastructure, strengthening public agencies, real minimum wage increases among others). But the letter ends with a commitment to responsible multiyear fiscal policy without getting into specifics.

Beyond the election, the reality is the next president faces similar fiscal and governability challenges, so I do not expect a dramatic change of policy direction.

The interest-to-GDP ratio has nearly doubled to around 6%, the highest level across the Latin American region. This interest burden will remain elevated so long as the Central Bank of Brazil (BCB) maintains the restrictive monetary policy stance it began in 2021 as inflation started to pick up.

While real wages in Brazil are still below pre-COVID levels, they are accelerating quickly. Data released last week point to a 2.5% year-over-year increase in real wages. During the campaign, both Lula and Bolsonaro promised further increases via minimum wage bumps.

 

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