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Your Location :Information>National Business 2018-10-09 15:10:54

Market Gives Brazil's Bolsonaro 70% Chance Of Winning

Resource:  Forbes Keywords:  Market, Brazil, general election

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The Workers’ Party will not regain power, predicts Nomura Securities in New York on Monday. Jair Bolsonaro will be Brazil’s next president. The market is roaring back to life, for now.

Brazil’s first-round general election is over. As expected, it’s Bolsonaro versus Fernando Haddad of the Workers’ Party (PT). Bolsonaro is basically a career politician from a tiny party that lept to prominence in the Congress on Sunday, riding this man’s coattails. Haddad is a one-term mayor of São Paulo who was handpicked by Workers’ Party founder Luiz Inacio Lula da Silva. Lula is in jail for his role in the massive Petrobras Car Wash scandal, a scandal his supporters wish would go away. In a huge mistake on Monday, Haddad reportedly visited with Lula in jail to discuss the campaign , according to Folha de Sao Paulo cultural insider Monica Bergamo.

The more Haddad positions himself as a mini-Lula, the easier it will be for Bolsonaro to attack him and make a Haddad vote a vote for corruption. Here is a leading political candidate that is visiting with a man behind bars to solicit campaign advice. Only if you believe Lula is a political prisoner like Nelson Mandela does this meeting make any sense for Haddad. According to Datafolha, a respected São Paulo polling firm, only 37% think Lula is innocent and should be set free. Haddad got about 30% of the vote, so he couldn’t even convince all of those who think Lula is innocent to vote for him.

And for this reason, Nomura thinks Bolsonaro’s odds of winning have greatly increased.

“We saw a chance for a first-round victory, but viewed it as unlikely and expected Bolsonaro to enter a runoff as the favorite with around a 60% victory probability,” wrote Nomura analysts Joao Ribeiro and Mario Castro in a note to clients today. “After Sunday’s results, his edge over Haddad in the runoff has increased to above 70% and he is now more of a favorite."

Bolsonaro turned his small Social Liberal Party (PSL) from a minor player in Congress to, in Reuters words, “a national behemoth” on Sunday. All establishment parties got absolutely clobbered yesterday. The PSL is now the No. 2 party in Congress after the PT, but they have more natural allies in a generally conservative congress than Haddad would have if he wins. PSL went from 8 seats to 51. Brazil’s lower house of Congress has 513 seats and over a dozen parties. (Yes, it’s insane.)

“I wouldn’t rule out Haddad,” says Bertrand Delgado, director of global markets for Societe Generale in New York. Polls had Haddad with 21% of the vote and he ended up with 31%. Bolsonaro ended up with even more, close to 49% at one time on Sunday before all votes were tallied. “Haddad is already looking for alliances with center-left candidates, and he has the PT’s well-oiled political machinery behind him,” he wrote to clients in a note today.

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Part of that machinery is messaging to key states in the north that a vote for Bolsonaro is a vote for a return to dictatorship. Others are busy Googling the definition for fascism, a word tossed around to describe Bolsonaro.

Anti-Bolsonaro activists protested his candidacy a week before the election and in the days leading up to it. Here are some AP photos by photographer Silvia Izqueirdo showing the type of crowd that hates Bolsonaro:

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They say he is a fascist, a racist, a homophobe and a misogynist. The two most popular instances of this are this year’s old fight with a female reporter who he said was not good enough to be raped by him—after she called him a rapist. And when he said that no parent wants a gay child. This will be repeated over and over again in the foreign political press for the next two weeks, mark my words. The idea is to work up on-the-fence Haddad voters into a frenzy. If Haddad wins, it means this strategy worked as PT is clearly seen as the party that drove Brazil into the ground.

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Regardless of the political theatrics in the days ahead, Haddad and Bolsonaro will rule a country in dire straits.

Both will have to move on structural reforms, some of which may require constitutional amendments. Both will have to unite the country on issues of fighting crime, ending corruption (to the extent that is even possible) and helping to get this economy going for all Brazilians, no matter who they voted for.

Brazil has low inflation on its side, and interest rates that are high enough to leave room for more cuts to get real rates even lower. This is good for businesses and consumer credit.

But with China and the U.S. fighting a trade war, emerging markets like Brazil face external headwinds not of their own making. Investors will test the new president’s willingness to fix the economy in the first quarter after Inauguration Day in January. The market will want quick results, rather than risk what they are seeing in Argentina with President Mauricio Macri making hard choices too late in his presidency. Argentina is now stuck with the International Monetary Fund. If things get worse in Brazil, could the IMF stage a comeback there, too?

“Financial markets have moved to assume that Bolsonaro will become Brazil’s next President,” says Edwin Gutierrez, Aberdeen Standard Investment’s head of emerging market sovereign debt. "(Today) the market is breathing a sigh of relief that Haddad, whose policies would not have helped Brazil get out of its current economic hole, will almost certainly not become president now," he says.

A big part of Bolsonaro’s appeal is the fact that he’s not part of the political establishment that has lost its credibility in recent years because of the Petrobras graft scheme. Gutierrez thinks Bolsonaro has a “credible plan” for how to deal with two of Brazil’s most urgent economic problems: pension reform and government debt. Bolsonaro voters are also keen on putting new faces in Congress and in the executive branch, hoping they will minimize endemic corruption and get tough on national crime.

Despite a boom in the Brazilian stock market today, local market participants expect a tough two weeks.

“We expect both candidates to clarify their policy positions on a number of issues in the second round, and are particularly looking for concrete strategies to get the job market going, raise incomes, and answers to structural questions about the future of this country,” says Marcos Costa, CEO of DMI Group, a private equity firm in São Paulo. “The market will react well at first. But anything goes in the second round,” he warns. “There is a lot more mudslinging to come.”



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