by Leandro Manzoni

Investing.com: Any projections for Brazil 2022 must take into consideration the outcome of the October presidential election and the possible outcomes. 

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. However, this scenario can change depending on the performances of candidates or the economic winds.

This is still the most common scenario that investors use to price their assets on 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.

Investing.com spoke to Paulo Gama (XP Investimentos policy analyst) in order to get a better understanding of the elections and their impact on markets. 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. Interview conducted December 20th, before approval of the Budget for 2022, announcements of strikes by public workers, and the news about Bolsonaro’s hospitalization.

Investing.comWhat has been the Bolsonaro government’s performance so far? Is there any chance of them approving reforms by 2022?

Paulo Gama: 2019 was a year that the government focuses on Social Security Reform [which was approved]We started 2020 in the hope of finding strength for a second wave reform.

But the pandemic halted the progress and completely altered the plan. Without realizing the consequences, government officials moved to an income assistance agenda.

This is a significant injection of resources to the economy. The government acted according to the following thought: “If we err, let’s err on the side of doing too much.”

The original agenda was to be resumed in 2021. But, a second round of Covid-19 was introduced that proved stronger. The government then became tied to emergency aid, trying to reverse the decline in popularity and get back to its approval levels in mid 2020, when emergency aid was initially implemented in an initial amount of R$600 per monthly per person (an injection equivalent to R$400 billion into the economy in 2020).

So, the government turned its attention to 2022’s presidential election and decided that a stronger cash transfer program would help it regain popularity. 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.

The government has set this agenda for 2022. To achieve it, they had to change fiscal rules. The loss of fiscal anchor is felt and priced by the market [with the change in the Spending Limit Law.]

The government responded by directing efforts to the approval of industry-specific  sectoral agendas in Congress. At the close of 2021 the Railroad Framework was passed and the BR of the Sea, which regulates the transport sector, was adopted.  

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.

ICIs it possible for Bolsonaro to increase the scope and value of its cash transfer program and regain popular support in order to be competitive and win the election? Is it going to need additional measures? Or can the government benefit from low inflation or unemployment?

PGWe have data dating back to 1996 that shows a strong correlation between the popularity of the president and unemployment. The government plans to make 2020 and 2021 the same, with enough money being injected into the economy. This is evident in the model, which suggests that the government will enjoy greater popularity. 

It seems that this is the government’s interpretation. But the fact is that 2020 and 2021 were unknown years and this agenda required large amounts of resources.

The market saw the need for the move as necessary in light of the current situation, so it did not consider that fiscal control was lacking. The decision of the government did not result in an asset price spike. [during the peak of the pandemic].

Injecting more money into the country now is in direct conflict with fiscal constraints of the Spending Limit Law. The rule has been altered to accomplish this objective. However, it can lead to loss of fiscal credibility. The exchange rate and inflation are both affected.

This led to the Central Bank sustaining high interest rates. It may have had a negative impact on the popularity of the government as a result. Monetary tightening is associated with slower economic growth and less job creation.

While it’s not clear that inflation will remain at its current 10% per annum in 2022 or beyond, there are some indications it may. Tax changes needed to expand the cash transfers program could prove less advantageous for the government than originally anticipated, and may not have the expected positive results.

Bolsonaro might still be popular, though not to the same extent he would if the interest rates were lower, the growth rate higher and inflation lower. This is despite the fact that he hasn’t been subject to the fiscal changes and expansion announced in October.

ICWhat is the major agenda for the elections of 2022? They will be marked either by anti-politics as in 2018, or an end to hunger like in 2002. Who might be the best candidate?

PGThe economy will guide the election according to our qualitative and quantitative research. Voters want to know who will solve real-world problems.

The November polls showed that 40% of respondents said that their biggest problem for 2022 was economic problems. They also expected that the next president would solve issues related to inflation, wages, buying power, poverty, unemployment, and hunger. This figure is almost double that of the 2017 polls, which were conducted in November. In 2017, corruption was the top issue and people wanted to see change.

A combination of economic demand and growing rejection of President Bolsonaro has made former President Lula’s candidacy the most popular choice among 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. 

ICAre there any chances that any candidate could be seen as a potential change in economic management or reformulating the agenda for social reform?

PGThat’s the problem. What is the best way for a candidate who has a solid program and an experienced team to make the public policies he’s forming palatable to voters?

When one questions qualitative polls, this combination can be the biggest challenge.

How do voters view candidacies in the context of making decisions? Lula’s candidacy is more logical than a third party candidacy.

It took us a long time to understand where the voters might see a third party force. It seems that the current space is very limited. While there are some electorates who will look into alternatives, they may not be as many as we might like.

IC: Why?

PGThis is a guide poll where voters are asked to vote for one of two candidates. This is almost two-thirds the total electorate that participated in the guided survey.

The spontaneous poll was conducted without the submission of any candidates. 59% votes were divided between Bolsonaro and Lula.

The conviction rate for this vote is high, too. Lula is supported by 43% of the voters who say that they will vote for him. Bolsonaro has 24%. These are significant numbers of voters who have been convinced to vote for Lula.

Although we are still nine and ten months from the election, there’s still a lot to go. But it wouldn’t take much for a third party candidate to win votes from the other two.

IC: What voter profile is a third-party candidate looking to win?

Third-party voters do not wait to move to one candidacy. A third of the group is in support of Ciro and another third, more or less, supports Moro. The rest are split between liberal centre candidates like Felipe D’Avila, Partido Novo. A combination of all these points would be needed to strengthen one name in opposition to Bolsonaro and Lula.

We believe there is an alternate scenario which could lead to this third party. It would involve a more severe economic decline that affects Bolsonaro’s popularity. So that Bolsonaro arrives in office with a higher percentage of good and excellent ratings than 30%. This would reduce the support for the president from the economic environment.

Polls indicate that about 20% to 30% of Bolsonaro’s voters will vote for Moro, currently holding approximately 10% of the desired vote. Moro would gain between five and six percentage points. His vote share could rise to around 15% or 16%. In this scenario, Bolsonaro will lose votes and drop to about 20%. This would result in a balanced vote between the candidates.

While this projection is possible, the conditions necessary for the formation and consolidation is not established yet.

ICCurrent president Lula is leading the polls with the possibility to win the first round. How would Lula look in the third term?

PGLula is a politician that gives mixed signals to many different, but generally large audiences. He also attempts to engage with businesses sectors while he talks to sectors that are further left than his Labor Party.

He seems to be signaling the leftist public that his priority is to consolidate 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. The Brazilian Socialist Party was strong in Pernambuco and especially in Recife.

Lula’s first responsibility is then to attempt to lead the leftist forces. Once he has completed this step, he can move to the 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.

The market seems to be waiting for a sign that points towards more responsible fiscal policies or some other type of signal.

Lula acknowledged Alckmin’s suggestion and the signals that his candidacy would be more like a presidential candidacy than one of dialogue. He will not take a radical stance from the very beginning. Lula would never have considered Alckmin as his vice-president if he had a radical position. Although it might not be true, this hypothesis shows that things are moving in the right direction.

ICWhat would happen if the Bolsonaro candidacy was reaffirmed by Paulo Guedes at the Ministry of Economy for a second term?

PGThe market is pricing in the policy shift. Asset prices are more important than words from an economist or manager. They have clearly shown that the market felt the changes in fiscal spending rules and the immediate effects. Markets are pricing in the risk that fiscal rules might not be sustainable long-term and have internalized the risks.

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 said that he would continue to pursue industry-specific policies. This is similar to what was achieved at the end 2021. Bolsonaro’s government may still be able to achieve some success in this area despite the focus of the government on the election.

The market is responding differently to 2019’s government on fiscal and macroeconomic issues.

ICWhat does the market think about third-party candidates? What candidate is most likely to be associated with liberal reform? Is the message and name of the candidate clear?

PGAccording to November’s market surveys, Ciro is the candidate who has the most left-leaning agenda. Both extremes were Ciro, on one hand, and Doria, on the other.

The market performs a 2-step assessment between Doria and Moro. First, the first is related to the economic agenda. Both of them have chosen to align themselves with highly respected names in the marketplace. Moro is pictured with ex-president of 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].

This second stage concerns the possibility of Congress implementing this agenda. The market is most skeptical about the performance of a Moro government. This is because the ex-judge has not had enough experience with the Executive branch to review his convictions for this particular economic agenda. He is also running against traditional politics which could pose challenges to his ability to govern.

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.

The market is more skeptical about the viability and ability to implement a Moro government, so our research suggests that Doria would have the most appeal. 

ICWhich role does the former president Michel Temer have in this election Particularly since he is responsible for the institution-securing role in this election, but disliked by voters due to the corruption scandals that erupted during his time as president.

PGFormer President Temer could be a valuable partner in either candidate’s efforts to build alliances and dialogue with other forces. His symbolism of interlocution can make him a powerful force in any candidacy.

This is an internal force within the political classes of dialog in times of articulation with the Legislative or the Judiciary.

This isn’t an electoral force. He admits to not having the popular support to run for another term.

Temer serves more as an emblem of inner dialogue than it does as a campaign tool.

IC:  Can Temer boost the market’s estimation if he is at least seen as a supporter or articulator of a candidacy? He is well known by the market for the reforms he has implemented during his term.

PG: That I agree with, especially when there is institutional friction or a lack in dialogue or the ability to govern. This asset, regardless of whether or not the government is involved, provides the predictability the market seeks.

In the event of doubts about government’s ability and institutional respect, his presence may be seen positively or as a healer.

ICWhat is the current market’s reaction to the elections?

PGThe market may be still interested in one point until April: To see if the government will attempt to put into effect electoral benefit policies by both congressmen and the government. It will also be looking at how the government handles oscillations in its popularity survey to see if it has any other cards.

ICMarket Fear: Will Bolsonaro implement intervention policies similar to the one implemented by President Erdogan in Turkey to reduce high inflation and lower interest rates?

PGThe market seems to be concerned by this. The market’s concern seems to be more related to the readjustment of public servants and the diesel fuel voucher mentioned by Bolsonaro. These would involve interventions that are less structured, but more timely and temporary.

This is a direct result of the statements of the President, who said the diesel-payment coupon was something he had personally stated.

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