Investors Love Bolsonaro. Can He Deliver?

Financial markets and big business are absolutely giddy about the near-certain victory of far-right Brazilian presidential candidate Jair Bolsonaro in Sunday’s runoff election, but it’s not at all clear he’ll be willing or able to deliver the free-market revolution they’re hoping for.

Investors have sent the Brazilian stock market soaring since Bolsonaro prevailed in the first round of the elections earlier this month over a candidate from the Workers’ Party—which led Brazil for most of this century—pumping up the currency and juicing confidence throughout the business community in Brazil and elsewhere. That’s because, while the former army captain’s aggressive, populist rhetoric grabs most of the world’s attention, the business community has focused on his liberal, free-market economic playbook.

The appeal is bound up with the specifics of Bolsonaro’s economic program—mass privatizations, ambitious pension reform, and lower taxes.

But it’s also connected with what Bolsonaro stands against: the years of perceived economic mismanagement by the Workers’ Party that led to spiraling debt, sluggish growth, and high unemployment.

“The reaction of the financial markets was more a kind of relief that Brazil was not going to have the same disastrous economic policies as before, because it can’t take more of that,” said Carlos Caicedo, a Latin America risk analyst at IHS Markit, a consultancy.

The big question is whether investor and business confidence will be repaid, or if their hopes will be dashed on the rocks of Brazil’s messy political reality. Many see Bolsonaro’s economic plan as a legitimate blueprint to tackle Brazil’s genuine economic ills.

“I think the economic policy direction is going to be a good one. The enthusiasm on that front is well grounded,” said Christopher Garman, the managing director for the Americas at Eurasia Group.

Others see in Bolsonaro a leopard trying to change its spots with his economic plan—a late and hasty appeal to ideas that have little chance of gaining traction in Brazil.

“There’s no real substance, nothing to back up this euphoria, other than the fact that it is a change,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “I suspect everybody is in for a rude awakening.”

 If he wins as expected on Sunday, Bolsonaro will start naming his cabinet, in preparation for his inauguration next January and the opening of the new Congress in February.

If there’s skepticism about his embrace of extreme free-market orthodoxy, that’s because Bolsonaro admits he doesn’t know or care much about economics. His overriding concern is fixing Brazil’s disastrous security situation, which has seen murders spike to over 60,000 a year. What little track record he assembled in 27 undistinguished years in Congress indicates support for statist economic policies and hostility toward privatizing Brazil’s state-owned giants.

But as his economic brain, Bolsonaro tapped Paulo Guedes, a University of Chicago-trained economist who peppered the campaign’s manifesto with references to free-market idols Milton Friedman and Friedrich Hayek. If Bolsonaro wins, he has said, Guedes—who is currently under investigation for alleged fraud—would become a “super minister” with broad responsibility for the economy.

But it’s not clear that Guedes and his free-market gospel have much support among Bolsonaro’s own voters, or Brazilian society at large. For decades, regardless of who was in power, the state always dominated economic activity, from producing oil, gas, and electricity to handing out patronage to favored sectors. Even Bolsonaro has backtracked on parts of his platform during the campaign, disavowing plans to privatize big state-owned energy firms like Electrobras and Petrobras, for instance.

“Conservatism in Brazil means state intervention in one way, and leftism means state intervention in other ways. It is not a small-state mentality by any stretch of the imagination,” de Bolle said.

However, socialist Venezuela’s economic implosion has given statist policies a very bad name, especially in much of Latin America. That creates an opening for Bolsonaro to tap into anxieties about the Workers’ Party’s more statist approach.

“He’s saying, ‘I’m not Venezuela, I’m not the Workers’ Party,’” said Brian Winter, the vice president for policy at Americas Society/Council of the Americas. Bolsonaro’s main goal is to restore law and order and increase security, but in order to win the presidency, he needs the support of the business community, Winter said, leading him to a genuine change of heart on economics in recent years.

“I believe with considerable conviction he will stand by that philosophy once elected,” he said.

Another veteran observer of Brazil, former U.S. diplomat Thomas Shannon, suggested that if Bolsonaro has seemingly embraced pro-market economic policies, it’s less a late-life philosophical conversion to the Chicago school and more an effort to shatter the historic linkage between state industrial policy and government patronage and corruption.

“If he wants to attack the political power of his adversaries and end endemic corruption, one way is through well-targeted reforms that are about breaking the linkage between parties, government, and markets,” said Shannon, who was assistant secretary of state for Western Hemisphere affairs and later U.S. ambassador to Brazil.

If Bolsonaro is genuinely preparing to champion liberal economic policies, Shannon said, “the calculation is political.”

At any rate, the acid test will come next year when Congress begins its new session and the new government gets down to work—and it’s not at all clear that Bolsonaro can wrest sweeping economic reforms out of a fragmented and sometimes combative legislature.

“I’m less worried about whether he supports Guedes’s agenda. I’m more worried over his ability to execute it,” said Garman of Eurasia Group. “I don’t expect a long or intense honeymoon period.”

Much more so than in America’s presidential system, the executive branch in Brazil often has to defer to lawmakers—and more than 30 different parties won seats in this year’s congressional elections. Wrangling lawmakers with sometimes wildly different agendas has proven a challenge even for seasoned veterans of the Brazilian legislature, such as outgoing President Michel Temer.

“Overall, I think investors aren’t factoring in the difficulty in pulling together the needed majorities for economic reforms such as pensions, labor, taxes, and others,” said Shannon O’Neil, a Latin America expert at the Council on Foreign Relations.

One big battle will be between Bolsonaro’s wish to make a big splash on his signature concerns, like law and order, and the markets’ expectation of quick progress on economic reforms.

“Investors are assuming Bolsonaro will prioritize economic reforms over social and security ones. I don’t think they should assume that, given Bolsonaro’s own expressed interests and the tenor of his campaign. He talked about security on every stop. Expect him to follow through,” O’Neil said.

On the other hand, Bolsonaro might be able to parlay a big win this weekend into early momentum in Congress, despite its fragmented nature. The trick then is to decide how to spend that political capital.

“Bolsonaro will have an opportunity to generate a series of political alliances and coalitions that will allow him to accomplish some things. The question is, what does he want to get done, and how does he prioritize?” said Shannon, who is now a senior advisor at Arnold & Porter.

One potential problem: Many fear that as Bolsonaro unleashes state security forces against the crime and insecurity that plague Brazil, abuses and bloodshed will follow. That could make it harder to achieve the economic reforms he says he wants.

“If you end up with a government that is a pariah because of what it is doing on the security and human rights front, that will inevitably poison their best efforts on the economic front,” Winter said.

And as much as Bolsonaro wants to focus on his bread-and-butter issues like security, he has got to make rapid progress fixing at least some of what ails Brazil’s economy lest the investors who are cheering him now turn on him with a vengeance.

The country is just crawling out of its worst economic crisis in decades. The economy shrank in 2015 and 2016, and unemployment skyrocketed to record levels. Even with a tepid recovery underway, productivity is low, unemployment is stubbornly high, and GDP growth is anemic.

Making things more challenging: A global trade war, especially between China and the United States, that threatens to drag down global economic growth next year. That creates a risk for Brazil of falling exports, a weakening currency, rising interest rates, and a brake on recently resumed growth.

Looking further ahead, Bolsonaro will have to finish the job of reforming the bloated pension system, which costs the state more and more every year and which, if unaddressed, will blow up the budget beginning in the next decade, Caicedo said. But doing so will mean taking on vested interests among Bolsonaro’s own base, including the military.

“Whoever says that Bolsonaro is going to tackle pensions head-on is lying,” Caicedo said.

The markets that have been cheerleading Bolsonaro’s rise may not have much patience if he starts to backtrack on his economic pledges or simply fails to get them through Congress. A setback in tax reform, privatization, or the pension fight could all spell a cascade of trouble, from a downgrade of Brazil’s sovereign debt to a plunging currency.

“If short, medium, and long-term solutions are not found to Brazil’s fiscal woes, the market is going to turn on him quickly,” Winter said.