by Leandro Manzoni
Investing.com – Any outlook for investing in Brazil in 2022 has to take into account the October presidential elections and what the potential result may be.
Nine months before the election, the current scenario is that former president Luiz Inácio Lula da Silva of the Workers’ Party is the frontrunner and favorite to win, according to the latest polls. This scenario is not definitive, however, and is susceptible to change according to the performance of the candidates and the changing winds in the economy.
Even so, this is the base scenario for most investors as they price assets in the market. There are still alternative scenarios and market projections in case either current president Jair Bolsonaro is reelected or there’s a victory for a third-party candidate – those who oppose both the reelection of Bolsonaro and a new term for Lula – such as the former judge and former minister Sergio Moro, the former minister and former governor of Ceará, Ciro Gomes, or the governor of São Paulo, João Doria.
To get a clear picture of the election and its impact on markets, Investing.com talked to Paulo Gama, policy analyst at XP Investimentos. Starting with the current electoral polls, the main subjects discussed were the people’s intentions, asset pricing, and the role of each candidate and other politicians in the coming months. The interview was conducted on December 20, before the approval of the 2022 Budget, the announcement of a strike of public employees, and news of Bolsonaro’s hospitalization.
Investing.com: How has the Bolsonaro government been so far and is there a possibility of approving any reforms in 2022?
Paulo Gama: The government started 2019 focused on the Social Security Reform [which was approved], and started 2020 wondering if there would be strength to have a second wave of reforms.
However, the pandemic paralyzed and completely changed the agenda. The government rightly moved towards an agenda of income aid, without knowing the gravity of what lay ahead.
The injection of resources into the economy is very significant. The government acted according to the following thought: “If we err, let’s err on the side of doing too much.”
In 2021, there was initially a resumption of the previous agenda, but then came a second wave of Covid-19 that was much stronger than the first. The government was then tied to the emergency aid agenda, seeking to reverse the fall in popularity and return to the approval levels it had in mid-2020, when the emergency aid was implemented in the initial amount of R$600 per month per person (an injection of approximately R$400 billion in the economy in 2020).
The government thus turned its focus to the 2022 presidential elections and decided to regain popularity through a more robust cash transfer program. Instead of ending the emergency aid and directly reactivating the Bolsa Família Program, the government decided to expand the previous program, increasing the monthly cash transfer amount from an average of R$190 to R$400 and expanding coverage from 14 million to 17 or 19 million families.
This is the government’s agenda for 2022, which required changing fiscal rules to be implemented. The market feels and prices the loss of the fiscal anchor [with the change in the Spending Limit Law.]
The government responded by directing efforts to the approval of industry-specific sectoral agendas in Congress. By the end of 2021, the Railroad Framework and the BR of the Sea (which regulates the transport sector) was approved.
But, as the government concentrated its efforts on the approval of the Proposed Amendment to the Constitution (PEC) of the Precatórios, which it thinks will be its public “salvation” with the creation of a larger income transfer program than it had before the pandemic, other agendas that did not have much commitment from the government ended up being left aside, such as the Administrative Reform and the broader Tax Reform.
IC: Is increasing the value and scope of the cash transfer program enough for the Bolsonaro government to regain popularity and enter the electoral arena competitively? Or will it need other measures or benefit from, for example, falling inflation and unemployment?
PG: Our models show that there is a very strong correlation, with data since 1996, between inflation, unemployment, and presidential popularity. The government is looking (with the above plans) to repeat 2020 and 2021 with a sufficient injection of money into the economy so that these resources work as an employment variable. And this is reflected in the model as if the government will gain in popularity as a result.
That seems to be the government’s reading. The point is, however, that in 2020 and 2021 this agenda was an unknown and required a large injection of resources.
The market understood the measure as necessary given the situation at the time, forgiving the fact it was seen as a lack of fiscal control. For this reason, the government’s decision was not penalized with a spike in asset prices [during the peak of the pandemic].
The government’s decision now to inject more money into the economy collides mainly with the fiscal restrictions of the Spending Limit Law, whose rule has been modified to meet this objective, leading, however, to a loss of fiscal credibility. This affects inflation and the exchange rate, which feedback on each other.
The consequence is the reinforcement of high interest rates by the Central Bank, which may have negatively impacted the government in terms of popularity with the introduction of high interest rates in the model, because monetary tightening means slow economic growth and a slower pace of job creation.
In relation to inflation, although there is no prediction that it will continue at the current level of 10% per year in 2022, it will still be somewhat persistent. The tax changes required for the expansion of the cash transfer program may, therefore, be less beneficial for the government than previously estimated, not generating the positive effects initially expected.
President Bolsonaro may nevertheless regain some popularity, but not at the level he could achieve if interest rate levels were lower, growth higher, inflation lower and without the expansion and fiscal change decided in October.
IC: What will be the main agenda of the 2022 elections? Will they be marked by an anti-politics sentiment as in 2018 or by an end to hunger as they were in 2002? Which candidate might benefit the most?
PG: Our quantitative and qualitative research reflects that it’s going to be an election guided by the economy. Voters are thinking about who is going to solve the real daily problems.
In November, 40% of voters responded that economic issues were their main problems for 2022, and they had the expectation that the next president will solve problems related to salary, inflation, purchasing power, hunger, misery and unemployment. This is double compared to the polls for the 2018 elections conducted at the end of 2017, when the first place was corruption and there was a desire for change.
The combination of economic demands and the increasing rejection of President Bolsonaro since the end of 2020 has allowed the candidacy of former President Lula to capitalize as the main choice of these voters.
This voter remembers Lula’s memory positively, and doesn’t account for the favorable international economic climate or the clean slate Lula inherited from his predecessor, Fernando Henrique Cardoso, on account of Cardoso’s economic reforms.
IC: Is there a possibility of any candidate being seen as a change in terms of economic management, reformulating the reform agenda with social aspects?
PG: That is the challenge. How does a candidate with a program with good ideas and a team manage to translate the public policy that he is formulating in a way that is palatable to the voter, meeting the wishes of the population?
This combination is perhaps the main challenge when one asks in qualitative polls if in fact there is room for someone who can show himself to have the condition, capacity, and experience to solve the problem.
The question is: how do voters, at the moment of decision making, look at these candidacies? Recall, remembrance, and identification seem to make sense for Lula’s candidacy, more than for a third-party candidacy.
We have put a lot of time and effort into understanding where a third-party force might arise in the mind of the voter. And the space today seems to be very narrow. There is a contingent of the electorate willing to look for alternatives, but it is not as large as one might imagine.
PG: In the guided polls where the list of candidates is given, 68% of voters already give their votes either to Lula or to Bolsonaro. That’s practically two-thirds of the electorate in the guided poll.
In the spontaneous poll, without the presentation of a list of candidates, 59% of voting intentions are divided between Lula and Bolsonaro.
And the degree of conviction of this vote is also relatively high. Lula has 43% of voters saying that they would definitely vote for him, while 24% say they are sure to vote for Bolsonaro. This is a relevant level of convinced voters.
We are obviously nine, ten months away from the election, there is a lot of water to pass under the bridge, but it would take a very big force for a third-party candidate to take votes from these two.
IC: What is the voter profile of a third-party candidate?
PG: Third-party voters are not one bloc waiting to migrate to a single candidacy. There is a third of this group that positions themselves in favor of Ciro, another third that positions themselves, roughly speaking, in favor of Moro, and the rest divided between more liberal center candidates such as Felipe D’Avila (Partido Novo). There would need to be a combination of these differences that would strengthen a single name against Lula’s or Bolsonaro’s candidacy.
What seems to us to be an alternative scenario that could allow the emergence of this third party would be a greater deterioration of the economic scenario that impacts Bolsonaro’s popularity, so that he arrives with a percentage of excellent and good ratings closer to 20% than 30%, which would weaken a contingent of the president’s electorate due to the economic situation.
The polls show that between 20% and 30% of Bolsonaro’s voters are willing to vote for Moro as a second choice, who currently has approximately 10% share of the intended vote. Moro would thus gain five, six percentage points, and rise to close to 15%, 16%. Bolsonaro would lose votes in this scenario and go to around 20%, leading to a balance between the two candidates.
This is a projection, there are still no conditions for the emergence and consolidation of this third party, which is dependent on events that have not yet happened.
IC: Former president Lula leads the polls, with the possibility of victory in the first round. What would Lula’s profile be in a possible third term?
PG: Lula is a politician who gives very mixed signals, to different and generally broad audiences. At the same time that he dialogues with sectors further to the left of his Labor Party, he tries to have some dialogue with business sectors.
It seems that he is giving signals to the leftist public as a first priority, consolidating his base. It is worth noting that the left came out of the 2018 election with Ciro as a force, and in 2020 Guilherme Boulos ran for mayor of São Paulo (reaching a run-off stage) and is also emerging as a force in this political field. And there was the Brazilian Socialist Party (PSB) with strength in Pernambuco, especially in Recife.
Lula’s first job, then, is to try to lead these leftist forces. Having solved this first step, he will move toward the political center. His approach to the former governor of São Paulo, Geraldo Alckmin (Independent), with the possibility of Alckmin being the candidate for vice-president on Lula’s ticket, is part of this tack.
I think the market is waiting to see if, based on this, there will be a signal that shows a path towards a more responsible fiscal policy or something of the sort.
With this nod to Alckmin, the signs coming from Lula’s candidacy are, for the time being, that he would try to be a presidency, more than a candidacy, of dialogue and without having a radical posture from the start. If Lula had the idea of having a radical posture, he would not be floating the possibility of Alckmin being his vice-president. This hypothesis, however much it may not come true, shows that the right things are being done.
IC: Would the Bolsonaro candidacy, even with the continuity of Paulo Guedes in the Ministry of Economy in an eventual second term, remain the representative of the liberal agenda, of privatizations, of reforms, even after the modification of the fiscal rules?
PG: The market has sensed and priced in a policy shift. The prices of assets count more than the words of a manager or economist, and they have shown quite clearly that the market has felt the effects, not only immediately, but also over the long term of the adjustment to the fiscal spending rules. The market is pricing in the possibility that the fiscal rules may not hold long term, and has internalized this risk in some way.
Regarding the price of assets, the market would react better to a second Bolsonaro government than a new Lula government, because there is still great doubt about the former president’s leanings.
Bolsonaro would try to follow through on the industry specific policies, similar to the advances made at the end of 2021. Even with the government’s focus on the elections, the advances in the concession program could mean that the Bolsonaro government could still have some successes on this path in a possible second term.
However, on macroeconomic and fiscal framework issues, the market has adjusted its response to the current government as compared to in 2019.
IC: How does the market assess the third-party candidacies? Which candidate will be identified with the liberal reform agenda? Are the signs in the discourse and in the names released for the economic advisory of the candidacy?
PG: The market places Ciro as the candidate with the furthest left agenda, according to our market surveys in November. The two extremes were Ciro on one side, and Doria on the other.
Between Doria and Moro, the market makes a two-step evaluation. The first is in relation to the economic agenda. Both have aligned themselves with experienced names that the market respects. In Moro’s case with the former president of the Central Bank Affonso Celso Pastore [Doria announced in December a team formed by the former Minister of the Economy Henrique Meirelles and the economists Ana Carla Abrahão and Zeina Latif].
The second stage is in relation to the ability to implement this agenda in Congress. This is the market’s main doubt about how an eventual Moro government would do, due to the fact that the former judge has had no experience in the Executive branch to test convictions in this economic agenda that he is defending, and is also running on an agenda contrary to traditional politics, suggesting challenges for the governability of his eventual government.
And when weighing Doria, he has held two executive roles: one in the City Hall of São Paulo and another in the State Government of São Paulo, the latter with a broad base of support.
As the market has greater doubt in the governability of an eventual Moro government and its implementation capacity, our survey suggests that the market would most appreciate the Doria candidacy.
IC: What role can former President Michel Temer play in this election? Especially since he represents the role of guaranteeing the institutions in the country, but is disliked by the voter due to corruption scandals during his government.
PG: Former President Temer can have a very valuable role to either candidacy in terms of dialogue and alliance building with other political forces. He is a symbol of interlocution, and this role can be a very considerable force for any candidacy.
It is a more internal force, within the political class, of dialogue in these times of articulation, with the Legislative and the Judiciary.
It is not an electoral force. He himself recognizes that he lacks the popularity to eventually run for a new term.
Temer offers more as a symbol of internal dialogue than as a campaign asset.
IC: Can Temer boost the market’s estimation if he is at least seen as a supporter or articulator of a candidacy? Because he is also well regarded by the market because of the reforms approved during his mandate.
PG: I think so, and especially in a context where some kind of more serious institutional friction and lack of dialogue and capacity to govern can be imagined. It is an asset that, regardless of the government, can provide the predictability that the market likes.
If there is a scenario of doubt about the capacity of government and respect for institutions, his presence can somehow be seen positively or as a healer of some difficulties.
IC: Is the market already looking at the elections?
PG: One point that perhaps the market is still paying attention to until April is to see if there will be another attempt to implement electoral benefit policies, both by congressmen and by the government itself. And also how the government deals with oscillations in the popularity survey, whether it may eventually have some sort of card up its sleeve.
IC: Does the market fear Bolsonaro implementing intervention policies in the economy similar to that of Turkey’s President Erdogan, who changed the president of the Central Bank so as to cut the interest rate amid high inflation?
PG: I don’t know if the market is worried about this. The market’s concern seems to be more related to the readjustment of public servants and the diesel fuel voucher mentioned by Bolsonaro. They would be interventions in less structural issues, with more temporary and timely measures.
And this comes from the president’s own statements, since the diesel-payment voucher was something he said himself, as well as the readjustment of public servants and pressure to increase the value of cash transfer programs in Congress.