What can investors expect from Brazil’s new president?

03 December 2018

Far-right congressman and former army captain Jair Bolsonaro was elected president in October 2018. Bolsonaro is likely to pursue a liberal economic agenda, but the new Congress is highly fragmented and will pose governability challenges. The incoming administration is expected to reduce social security spending, which could stabilise rising public debt but also provoke social unrest.

Security Environment

Bolsonaro, who ran for the Social Liberal Party (PSL), secured over 55% of the second-round vote against Fernando Haddad of the left-wing Workers’ Party (PT). He will take office in January 2019. While Bolsonaro is a highly controversial figure, having praised Brazil’s military dictatorship and been charged by the country’s public prosecutor with inciting hatred, his election illustrates the depth of dissatisfaction with rising crime and a political class tarnished by corruption scandals.

However, following a highly polarising election campaign, the risk of social unrest is set to remain high under Bolsonaro. The president-elect’s pension reform and privatisation plans are opposed by labour unions and are likely to provoke protests, particularly in central Rio de Janeiro and on Avenida Paulista in São Paulo. Bolsonaro’s pledges to loosen gun laws and strengthen the powers of the police to kill suspected criminals are likely to increase the number of extrajudicial killings, which will also raise the probability of demonstrations in major cities. 

A more aggressive security policy is also expected to increase the number of violent confrontations between security forces and criminal groups, elevating death and injury risks.

The risk of property damage during demonstrations is relatively low but there is a significant risk of business interruption. During a general strike in April 2017, provoked by a previous attempt to pass pension reforms, protesters erected roadblocks in major cities. 

Truck drivers in Brazil have carried out industrial action with increasing frequency, most recently in May 2018 when an 11-day nationwide strike severely disrupted air, port and road transport. Having already extracted government concessions on oil price subsidies and freight rates, truck driver unions could test the resolve of the Bolsonaro government with further strikes in the next 12 months.

Trading Environment

Bolsonaro has signalled his commitment to pro-market measures and his election should lead to an uptick in economic activity. Real GDP growth is forecasted to rise gradually from 1.8% in 2018 to 2.0% in 2019, but much depends on the Bolsonaro government’s ability to reduce the fiscal deficit, which has reached around 8% of GDP. General government debt is also comparatively high and has risen rapidly from 56.3% of GDP in 2014 to a forecasted 77.5% in 2018.

Bolsonaro’s pick for finance minister, Paulo Guedes, is a strong advocate of privatisation and public spending cuts. However, 30 parties are represented in the lower house of Congress and 21 in the Senate, and the highly fragmented nature of Congress will complicate attempts at implementing reforms. 

In addition, tensions may arise between Guedes and Bolsonaro, who as a congressman voted against a number of market-friendly measures. Bolsonaro has yet to clarify the details of his proposals for pension reform, and his target of achieving a primary budget surplus by 2020 is unlikely to be achieved unless a number of other cost-saving measures are implemented. However, the government is likely to approve at least a limited pension reform that stabilises the debt profile over the medium-term. 

While Brazil’s currency, the real, has fallen by over 12% against the US dollar in the year-to-date, the country’s modest currency account deficit, relatively low share of external debt and robust foreign-exchange reserves limit its exposure to external shocks. 

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Investment Environment

A Bolsonaro government may lack the political capital to pursue an ambitious privatisation programme in addition to social security reforms, and a full privatisation of state-owned oil firm Petrobras is not being considered. However, the incoming administration may sell a majority stake in the firm’s fuel distribution unit, Petrobras Distribuidora, in addition to units of state-owned power company Eletrobras.

Contracts in Brazil are likely to be enforced but the judicial system is cumbersome and legal trials can be highly protracted. A large number of Federal Police investigations are on-going and anti-corruption laws have been strengthened in recent years, increasing the risk of contract alteration if evidence of illegality is uncovered. 

Bolsonaro has chosen Sérgio Moro, the influential judge who leads the Lava Jato corruption investigations and convicted former President Luiz Inácio Lula da Silva, as his justice minister. Moro is likely to use his position to implement additional anticorruption measures, which may increase the risk of contract revision.

What can investors expect from Brazil’s new president?   

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Democratic Republic of Congo, Indonesia, Ukraine and Thailand all of which have been the subject of recent enquiries from JLT's client base.


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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com.