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Brazils Presidential Election Will Be a Watershed Moment

As other emerging markets wobble, investors are running scared

Financial Times

 

For three decades, two figures have towered over Brazilian politics. The first, Fernando Henrique Cardoso, stabilised the economy and laid the foundations for the economic boom of the 2000s. The second, Mr Cardoso’s successor as president, Luiz Inácio Lula da Silva, expanded social programmes and projected new confidence abroad.

In just eight years, that confidence has gone. In the wake of Brazil’s worst recession and biggest corruption scandal, there is popular fury instead. This is coming to a head in October’s presidential election, and it is no exaggeration to call this an existential moment for Brazil. The campaign has deeply unsettled investors already worried about emerging markets.

In most ways, Brazil is fortunate to have had two such remarkable leaders. Although fierce adversaries, over four consecutive terms they consolidated democracy after dictatorship, and improved the lives of millions. Sadly, they also cast a political shadow that stunted the growth of new leaders to take their place.

 
This is not unusual in Latin America, where former presidents often play an outsized role. But in Brazil the effect has been especially pronounced. One potential leader, Eduardo Campos, died in a 2014 plane crash. Brazil’s Lava Jato probe into multimillion-dollar kickbacks by state oil company Petrobras then took a strimmer to the rest.

One dark consequence is a near absence of credible candidates in the campaign that kicked off this month. Brazil’s disenchanted voters are looking instead to anti-establishment alternatives. This has disquieted investors.

When a recent poll showed Geraldo Alckmin, a bland centrist considered the market-friendly candidate, struggling badly, the Brazilian real slumped. The currency now ranks as the world’s third-worst performing this year, after the Turkish lira and Argentine peso. Credit default swaps have soared.

BRASILIA, DF, 29-08-2018, Geraldo Alckmin (PSDB) - Folhapress
What happens next in Brazilian markets depends to a large extent on what happens in its politics, which is anyone’s guess. The elephant in the room is Mr Lula da Silva, who is making a bid for a third term. Remarkably he is leading polls, although he is in jail on corruption charges.

The former union leader has claimed in the New York Times to be the victim of a rightwing plot. Mr Cardoso, arguing in this newspaper, has called this account a “grave distortion of reality”. What ever the case, Mr Lula da Silva will probably be barred from running under an anti-corruption rule that he himself signed into law.

That has focused attention on Jair Bolsonaro, a former military captain who is second in the polls. His strident law and order platform, akin to that of Rodrigo Duterte, the Philippine president, enjoys support among Brazilians fed up with crime. Mr Bolsonaro suffers higher unpopularity rates than the polarising Mr Lula da Silva. Even so, polls suggest he would trump Mr Lula da Silva’s running mate, who would assume the former president’s candidacy if he is forced to step aside.

PORTO ALEGRE- Jair Bolsonaro - REUTERS

Anti-establishment anger, alongside criminal scandals with constitutional implications, has become the new American playbook. It has been true of recent US and Mexican politics and elections.

Brazil’s difference, though, is that its economy faces a fiscal cliff-edge that needs to be addressed urgently whoever becomes president — even as none of the leading candidates seems to be leaders who can or would. Adding to the uncertainty, more than a third of voters say they do not know who they will vote for or if they will vote at all. There is everything to play for. No wonder investors are running scared.

Copyright The Financial Times Limited 2018