Political Risk Analysis - Election Season To Weaken Investor Sentiment - MAY 2018

It is still too early to hold a view on the likely outcome of Brazil's October presidential election. That said, we maintain our baseline assumptions ( see '2018 Election Initial Thoughts: Corruption Critical To Outlook', August 22 2017): corruption will be a dominant theme; the next administration will need to address pension reform; policy uncertainty will likely lead to volatile swings in sentiment that will pose headwinds to investment; and the centre-right has an overall advantage.

President Michel Temer's window of opportunity for major legislation is essentially closed. In February, we downgraded Brazil's score in our Short Term Political Risk Index to 55.0 out of 100, from 56.7 previously. This reflects our weakening assessment of the country's 'policy-making process' in light of Temer's inability to pass pension reform, a key priority ( see 'Pension Reform Defeat Signals Rising Risks', February 22). While an alternative set of lesser reforms has potential to improve the business environment, Temer's legislative influence will wane over the coming months. Finance Minister Henrique Meirelles, who has spearheaded reform efforts, is considering his candidacy and due to campaign laws has to leave his post by April if he decides to run. Speaker of the House Rodrigo Maia, who shepherded reforms through the legislature, is increasingly distancing himself from Temer as he pushes his own candidacy.

Investor sentiment will most likely soften over the coming months. While business confidence and investment has been more resilient than we expected ( see 'Buoyant Sentiment Supports Forecast Upgrade', March 5), the effective defeat of pension reform leaves the issue of fiscal sustainability unresolved. Moreover, the weak polling numbers of most centre-right, reform-supportive candidates raises risks that the next administration will not carry on Temer's reform efforts. Former President Luiz Inacio Lula da Silva continues to dominate the polls, despite a court upholding his conviction on corruption charges, followed by the populist Jair Bolsonaro and leftist Marina Silva. This could lead to capital outflows that would put downside pressure on Brazilian equities and bonds.

Centre-Right Still Lagging
Brazil - Voter Intentions, % (March 2018)
Source: CNT/MDA, BMI

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