A contentious election in Brazil that’s held the attention of the global investing community came to a conclusion on Oct. 28, 2018, with far-right congressman Jair Bolsonaro becoming the country’s president-elect.
Canadian pensions have made some hefty allocations to the region of late. In the second half of 2018, the Canada Pension Plan Investment Board acquired a Brazilian hydro company and invested in a logistics partnership. As well, the Alberta Investment Management Corp. invested $140 million in a Brazilian water and sewage company.
Broadly, Bolsonaro’s campaign promises offered a market-friendly outlook, including support for less government tinkering with the economy, cuts to government spending, possible austerity measures, tax cuts for businesses, an independent central bank and increasing privatization, according to a blog by Laura Ann Ostrander, emerging markets macro strategist at State Street Global Advisors.
However, the overall idea that the new leader will mean improvements for Brazil’s economy is worth examining a bit further, according to another recent blog, this one by Craig Botham, emerging markets economist, and Pablo Riveroll, head of Latin American equities, both at Schroders Investment Management Ltd.
With a long track record of outspoken rhetoric and voting against privatization, Bolsonaro changed his tune during his campaign, further assuaging worries by bringing in pro-market Paulo Guedes as an economic advisor to the campaign and now minister, the blog noted.
Currently, the country has an extremely high debt-to-GDP ratio (84 per cent), with the International Monetary Fund anticipating it will rise further, hitting 95.6 per cent in 2023, the blog noted. Exacerbating the issue, government spending is quite difficult to pare down as its majority is already taken up with social security programs, including pensions, the blog noted.
“Pension reform and ongoing fiscal discipline is deemed to be critical to medium-term fiscal sustainability in Brazil,” said Riveroll. “The performance of Brazilian assets is likely to depend on the extent to which the Bolsanaro administration delivers appropriate policy measures. Should the government fail to pursue sufficiently conventional economic policies, it is likely that the bond and currency market reaction would pressure the government to consider a more orthodox policy framework. As a result, we have conviction that fiscal sustainability will be addressed in the medium term.”
However, Bolsonaro’s enthusiasm for economic liberalism seems to be pushing Brazilian markets higher, breaking through a dearth of good news from emerging markets, the Schroders blog emphasized.
With positivity prevailing, investors shouldn’t forget the challenges Bolsonaro will face leading Brazil, noted Lupin Rahman, head of emerging market sovereign credit at PIMCO, in another recent blog. “Is this a new dawn for Brazil? That remains to be seen, but for now, the financial markets are giving Bolsonaro the benefit of the doubt,” she noted.
The country remains polarized over the election so Bolsonaro’s honeymoon period as a leader will likely be short-lived, said Rahman. As well, the congress he’ll be working with includes many different parties, making any reform to government spending all the more difficult. As well, the president-elect’s lack of any legislative track record is an uncertainty factor investors should watch, she added.