Lindsay Williams: With me now is Vivienne Taberer, Portfolio Manager for the Investec Emerging Market Fixed Income Team. We are going to talk about the Brazil election process which is underway at the moment but, Vivienne, before I do that, I want to read something from one of the UK newspapers recently published and it is pertaining to an IMF report which has recently been released. It says the following:
“Emerging economies are at risk of capital flight at levels unseen since the financial crisis and markets are complacent about financial conditions according to the global lender of last resort. Developing markets (it goes on to say), including Turkey, Argentina and several Asian countries are at risk of a sudden drop-off in foreign investor confidence. This could trigger so-called capital flight where assets from these markets are suddenly abandoned. This could total US$100 billion or more and be similar in magnitude to the Global Financial Crisis.”
That is the IMF, the International Monetary Fund’s Global Financial Stability Report. So I suppose, Vivienne, the last thing you need is the insidious hand of politics intervening in what is already a potentially fragile situation but that is exactly what we have got in Brazil at the moment. Can you characterise what has been going on as we have just completed the first round of the Brazilian electoral process?
Vivienne Taberer: Yes. So in Brazil what we have landed up with is we have landed up with an incredibly polarised election, with the far right, Bolsonaro, coming through with an almost win in the first round of 46%, and then the left, the PT Party (which is the imprisoned ex-President Lula’s party), Haddad, coming in with 29.3%.
So what we have landed up with is with the centre really losing votes and the votes becoming quite polarised. If we look at Bolsonaro, for example, he has been quipped as being the ‘Topical Trump’ in some quarters, sort of very far right. Then we have got Haddad on the left-hand side, which socially policies are much better but on the economic front they have not been well-managed in the past by the PT.
So what has happened here is we have got a very divisive campaign. We have got quite extreme outcomes, with the market really wanting Bolsonaro to win because of his market-friendly Economic Minister pick and being worried about what would happen to the Brazilian economy if Haddad comes through but, given what happened in the first round, the market is now largely discounting a Bolsonaro win.
Lindsay Williams: Yes, okay. So Bolsonaro, make Brazil great again, lots of Trump traits as well and a controversial figure. I mean this is all very well for the markets to like just like they have liked Mr Trump’s presidency so far and for very good reason it appears but, in the longer term, in your opinion, is this a good thing?
Vivienne Taberer: Well, probably not. We would like to have seen more centrist candidates come through that could balance things a little bit better. What we have had into the first round as well is we have had the congressional seats determined and we have also had the senate seats determined. What we have seen there as well is we have seen much more fragmentation, particularly in the senate.
So this means that it is going to be a difficult environment to get reform through, even if you have a pro-reform government in place because in Brazil you have to work within coalitions, you have to co-opt different congressmen in to getting the reforms through. So Brazil is facing a very challenging situation, regardless of who comes in on 28 October.
Lindsay Williams: Yes. The media attention around Mr Bolsonaro has been for various reasons because of his controversy, also because of his so-called illiberalism but in your piece you say his economic policies are much more moderate. So there is all this bluster because of the electioneering but on the other hand, when he sits down behind the desk should he be appointed, then maybe things will tone down a bit.
Vivienne Taberer: Well, that is what we have to see. Maybe market expectations are a little bit high at the moment. We have had some news overnight about a corruption investigation into his finance pick, Paulo Guedes, and that could derail things but what we are looking at here is we are looking at an environment that we may have more moderate, more market-friendly economic policy, that Bolsonaro is definitely not going to push forward a more liberal, more moderate social agenda.
So there are two different sides to the coin but for the moment the market is focussing on what would happen on the economic side, given that Brazil really has to adjust the trajectory of their debt to GDP. They need to do fiscal reform and particularly they need to do social security reform.
Lindsay Williams: How bad is the economy at the moment in Brazil? How bad has it become since the heady days when it was a poster country for emerging markets?
Vivienne Taberer: Well, Brazil has had a torrid time over the last couple of years, going into the financial crisis and, emerging out of the financial crisis, we did see some strength initially but then we see Dilma in charge, we saw the economy fall back into recession, we saw her impeachment and now we have seen a gradual recovery but Brazil is growing at relatively slow rates.
This year growth in Brazil is likely to be around 1.4% and around 2.4% next year if you look at the IMF forecast. So it is growing at a relatively slow pace relative to its potential and how it grew in sort of the heady Lula times that you referred to. So it is a more challenging environment for Brazil, more challenging domestically and more challenging globally.
Lindsay Williams: I have this fantasy in my mind where I think of sharp-suited traders and proprietary traders in emerging markets or at emerging market desks at investment banks around the world and they have a look at what is going on in Brazil or Turkey or Argentina and they have got a big, red button which says “sell emerging markets”. So if something bad comes out of the Brazilian election or something that they perceive to be bad for Brazilian markets, and therefore emerging markets, they press the “sell” button and everyone gets caught up in it, whether it be Turkey, Argentina or even the Republic of South Africa’s bond markets or whatever. How important (in my long-winded way) is Brazil to the emerging market scene and emerging market sentiment globally?
Vivienne Taberer: Brazil is quite important, given the size of the economy. Remember it is sort of a top 10 global economy so any negative impact that we see on Brazil will filter through into broader EM and risk sentiment. We do need to be cognisant of that but, after saying that, I think what happens in the US and what happens to global financial conditions is going to continue to be a bigger driver of overall emerging market sentiment than just Brazil on its own.
Lindsay Williams: Let’s get back to practicalities. Now the first round is over, what is the next step? When are we going to know who is in charge of Brazil, this incredibly important country?
Vivienne Taberer: We will know on the 28th October who will be in charge of Brazil. The pundits out there are saying that Bolsonaro now has a 75-80% probability of winning and we concur with that. It is still going to be a bit of a dirty race and there is likely to be some noise as we move through the next sort of two-and-a-half weeks.
We have the first poll since the first round coming out tonight and we are expecting Bolsonaro to show around a 55% voter intention versus 45% to Haddad. So the race is certainly not over for Haddad and there could be upsets and that could have an impact on the market, which will be closely watching the evolution of these polls, but the reality is, given the make-up that we saw in congress and given what the polls are telling us at the moment, it is very likely that Bolsonaro will be the next President of Brazil.
Lindsay Williams: Vivienne, thanks very much for your analysis. That is Vivienne Taberer, Portfolio Manager for the Investec Emerging Market Fixed Income Team.
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