Bolsonaro’s Trumpian pact


Rob Dwyer
Published on:

Jair Bolsonaro's election today as Brazil’s next president could well spell more market upside, but the nationalist protectionism that is likely to follow should give investors pause


The Brazilian markets have been soaring in recent weeks as it became increasingly likely that Jair Bolsonaro would become Brazil’s next president.

The real has been rallying; so too has the Bovespa.

Now that Jair Bolsonaro’s victory as president has been confirmed, there is almost certainly more upside to come as the markets get even further ahead of themselves.

Brazilian payments system Stone’s IPO, which caught the wave of positive sentiment about Brazil in the run-up to Bolsonaro’s win on 28 October to list on the Nasdaq on 25 October, has already broken the country’s IPO drought.

Other equity transactions will surely follow swiftly, and a solid pipeline of international bond deals from Brazilian international issuance is also expected before the end of the year.

These should perform well: there has been relatively little Latin American deal volume this year and any ‘Bolsonaro bounce’ could be quite large.

But those investors who are readying to invest in Bolsanoro’s Brazil would do well to think deeply about exactly what type of country they might be jumping into.

There has been much debate about which other world leader Brazil’s new president most closely resembles. During the campaign Bolsonaro’s erratic rhetoric on law and order was probably most comparable to the president of the Philippines, Rodrigo Duterte.

But a more powerful comparison, in terms of trying to predict how Bolsonaro’s administration will evolve, is with US president Donald Trump. Because, just like Trump, behind the populist wave that swept Bolsonaro to power are two divergent power bases.

Trump’s early administration combined a nationalistic, protectionist faction led by Steve Bannon, with a globalist-leaning, economically orthodox group, most obviously personified by ex-Goldman Sach’s Gary Cohn.

Bolsonaro’s nationalistic advisers – with a pronounced leading towards protectionism – are the group of current and retired generals, called the Brasilia Group.

Meanwhile, Paulo Guedes, a founding partner of the investment bank that became BTG Pactual (and which liked to invite comparisons with Goldman), was brought into the campaign to be his finance minister-in-waiting to provide economic and financial credibility.

Just as Trump’s administration suffered at times from irreconcilable tensions – and conflict – between adopting market-friendly approaches and implementing protectionist polices, so too will Bolsonaro’s.

It’s also clear that Bolsonaro is personally more politically in tune with his generals than with Guedes. His voting record as Congressman over 27 years has consistently been anti-privatisation and against social security reform.

His recent convergence to Guedes’ prescription of widespread privatizations, social security reform and other economic liberalization was already appearing to wane during the election campaign (as candidate Bolsonaro squashed Guedes’ suggestion of an introduction of a financial transaction tax and the possible full privatisation of Petrobras).

Bolsonaro’s choice of Hamilton Mourão to be his vice-president is further proof that his natural base will be with the generals. And whereas Trump felt the need to tread a fine line on withdrawal from international alliances, Bolsonaro has already committed to a quick withdrawal from the Paris climate agreement and has even suggested leaving the United Nations.

How will the military faction in Bolsonaro’s administration view the selling of Eletrobras, the electricity company? Or Petrobras’ distribution network of energy pipelines? Or handing other infrastructure – ports, airports and railways – to foreign ownership?

And yet it is on Guedes that the international markets have fixated.


Investment bankers are expecting strong demand for Brazilian credit and debt as buyers expect credit risks to dissipate and the economic recovery to quicken. There is certainly a positive scenario for Brazilian assets – including the currency – as a virtuous circle of market reforms that improves the sovereign’s credit risk leads to lower interest rates and, with inflation expectations anchored, growing credit demand, growing GDP and an appreciating currency.

However, the first step is always the most difficult, and it is important to look at one key difference between the administration of Bolsanaro and Trump. Whereas Trump’s Republican party has (for now at least) majorities in both the US Congress and Senate, Bolsonaro’s PSL will have 51 seats in congress (9.9%). 

And despite having these majorities in a bipartisan system, Trump still struggles to achieve legislative progress. Meanwhile, Bolsanaro will face a fragmented congress that contains an astounding 30 different political parties.

Such a fragmented political system has always made passing big legislative reforms in Brazil immensely difficult.

Previous governments have relied on a system of creating coalitions by exchanging ministerial positions to parties in return for parliamentary support (as well as less savoury practices to create voting majorities, such those as revealed in the Mensalao and Lava Jato schemes). 

However, Bolsanaro has committed to lowering the number of ministries by roughly half to 15 – if he does that, his ability to command the loyalty of a majority in the factious congress will be reduced.

Without effective fiscal reform – which would necessitate meaningful pensions reform (and the military will be loathe to lose its generous entitlements) – then the recent rally will fade. The currency would begin to fall again, pressuring inflation and leading the central bank to increase rates. The gross debt situation would deteriorate quickly and could conceivably pass 100% of GDP somewhere towards the end of next year, which could spark a financial crisis.

And if crisis does come, which way would Bolsanaro likely lean? Having admitted he knows nothing about economics and finance, would he place his faith on a markets-friendly policy prescription advocated by someone like Guedes? Or would he naturally align with his generals, who prescribe a more interventionist, statist solution?