Brazil’s Markets Have Surged on Hope of Bolsonaro Victory. Can He Deliver?

SÃO PAULO — Looking at Brazil’s rallying stock market and stronger currency, it might seem as if Jair Bolsonaro, the right-wing presidential candidate favored by investors, had already won and the country was bouncing back from its painful recession.

Bolsonaro has a substantial lead over his left-wing rival, Fernando Haddad, in Sunday’s election.

But Alexandre Schwartsman, a former central bank director, and other analysts have argued that it’s not clear what voters — and investors — will get with Bolsonaro in office. His campaign platform only provides a broad outline of what he would do to make Brazil grow again, and his campaign has issued contradictory messages.

“The financial market is deluding itself with the promise of a liberal economic program” from Bolsonaro, said Schwartsman.

Part of Bolsonaro’s appeal lies not in what he stands for but in what he stands against.

This election has effectively become, for investors and for many Brazilians, a referendum on Haddad’s Workers’ Party, or PT. It governed Brazil through a boom-and-bust cycle from 2003 to 2016. Many Brazilians blame PT for the country’s economic decline — and Bolsonaro was remarkably effective in presenting himself as the leftist party’s polar opposite.

“If the markets are a little apprehensive about Bolsonaro, they should feel completely insecure when it comes to the PT,” said Gustavo Bebianno, president of Bolsonaro’s Social Liberal Party.

The vote comes as the nation, the world’s eighth-largest economy, is struggling to emerge from a brutal economic downturn. That slump — worsened by a political crisis and a historic corruption scandal — has left nearly 13 million people unemployed.

Without swift and largely unpopular measures — including pension reform — the fiscal deficit and public debt could balloon out of control and push the country back into recession.

But Bolsonaro is not your average business-friendly conservative. With his abrasive rhetoric, shoot-first approach to fighting crime and socially conservative agenda, he is more often compared with leaders like President Rodrigo Duterte of the Philippines than with traditional free-trade minded fiscal conservatives.

When asked about the economy, Bolsonaro professes ignorance and points to his would-be finance minister, Paulo Guedes, a University of Chicago-educated and market-friendly economist hand-picked to reassure the business elite.

Central to Guedes’ ambitious plan for the economy is to put every public company and property — including the state-run electricity giant Eletrobras and the giant oil company Petrobras — on the auction block to raise more than $400 billion.

That, he argues, would reduce public debt while a crucial pension reform is hammered out.

But when asked about the idea during a recent television interview, Bolsonaro torpedoed it.

“Are you going to privatize in exchange for anybody’s money?” he said. “China isn’t buying in Brazil, China is buying Brazil! Are you going to leave our energy in the hands of the Chinese?”

During his seven terms as a lawmaker, Bolsonaro voted against privatizations, calling the landmark breakup and sale of the telecommunications monopoly a “barbarity.”

Bolsonaro, a former army captain, has defended Brazil’s military dictatorship and alienated many voters with incendiary attacks on women, blacks and gays. Nonetheless, he handily won the first round of voting, in part by positioning himself as the wrecking ball willing to demolish the political establishment Brazilians were so furious with after years of corruption scandals and economic turmoil.

Bolsonaro’s embrace by investors came late in the game, with influential groups like the agribusiness lobby endorsing him just days before the first round of elections.

As the race narrowed, markets sided with Bolsonaro over Haddad, who became the Workers’ Party candidate after the courts deemed the former president, Luiz Inácio Lula da Silva, the party’s de facto leader, ineligible to run because he was convicted of money laundering and corruption. He is serving a 12-year sentence. Many Brazilians hold the Workers’ Party responsible not only for the multibillion dollar bribery scheme uncovered by a corruption investigation known as Lava Jato, or Car Wash, but also for the deep recession that began under da Silva’s hand-picked successor, former President Dilma Rousseff.

Vanessa Gomes, a real estate broker in São Paulo, is among those who want a change.

“We know what 14 years of the PT brought — high interest rates and high unemployment,” she said. “Properties have been sitting on the market for two years. Bolsonaro is going to change that. I’ve already got clients just waiting for elections to be over to buy.”

Still, experts are divided over what “Bolsonomics” will look like.

“I think it’s a massive risk,” said Eduardo Mufarej, a former investment banker who founded the nonpartisan organization RenovaBR, which sought to get political outsiders elected this year.

“Markets are seeing the glass half full now,” Mufarej said, adding that 2019 will be a crucial year.

With lower interest rates, low inflation and a backlog of investments coming to market once elections are over, the economy will almost certainly rebound, Mufarej predicted. But it might not last long, he said.

“It will be a honeymoon,” he said.

But, he added, “Unless structural measures are implemented, like pension reform and tax reform, 2020 will be a completely different story.”

Analysts warn that without drastic measures debt could reach unsustainable levels in the next two years, leaving the government unable to finance itself and pushing the economy back into recession.

In Brazil, where workers on average retire at 55, earning 70 percent of their final salary, social security accounts for a third of all government spending, which has contributed to record fiscal deficits. That makes pension reform among the thornier challenges the new president will face.

While Guedes has repeatedly vowed to push an unpopular measure through Congress, Bolsonaro has again sent mixed signals.

“We can’t penalize those who have already acquired rights,” Bolsonaro said of the draft reform in a recent interview. “We can play with things, we have ideas and proposals in that sense, but no one will be penalized.”

Markets are optimistic his tune will change once the campaign is over.

“The problem isn’t the policy orientation,” said Chris Garman, a Brazil expert at Eurasia Group, pointing out that Bolsonaro spoke to dozens of economists over the past year, looking for someone with the right liberal credentials. “The problem is, how much can they get done?”

In pushing through any changes, Bolsonaro will be up against a fragmented Congress with 30 political parties. He does not have a track record of building coalitions and has said he will not partake in the traditional horse-trading required to pass legislation in Brazil. Mufarej, the former investment banker, said Bolsonaro could lose the chance to act if he doesn’t expand his inner circle beyond mostly military men and entice competent and experienced professionals to critical jobs.

To Eurasia’s Garman, the risk is ending up with watered-down measures.

“We will see compromises along the way,” he said. “If he doesn’t get pension reform done in a year, we could see a real blowout.”