Brazilian markets opened to a record high today following the election of Jair Bolsonaro as president.
The Bovespa stock market index reached 88,377 points as markets opened in São Paulo, passing its previous record of 88.317 in February, pulled by stocks of state-owned firms like Petrobras and Eletrobras, and banks like Itaú, Bradesco, and Santander.
Bolsonaro received 55% of the vote on Sunday (Oct. 28), defeating left-wing candidate Fernando Haddad. Already during the evening here in São Paulo, Asian markets started reacting positively to the news. Today, funds and trusts tracking Brazil in Germany, the UK, and Japan are up between 6% and 11%.
The Bovespa, which tracks about 60 firms in São Paulo’s stock exchange, closed high last week on expectations that Bolsonaro would be elected. While global markets slumped, the index was up 2% to 85,719 points on Friday (Oct. 26), reflecting gains in Brazilian airline Gol, state-owned oil firm Petrobras, and mining giant Vale. It has recovered from less than 70,000 points in June.
Why are markets so optimistic about Bolsonaro?
Markets are favoring Bolsonaro mostly because of Paulo Guedes, a liberal economist trained at the University of Chicago, who was appointed Brazil’s minister of the economy on Sunday. Bolsonaro and Guedes have promised to reform Brazil’s social security service, reduce the debt, cut the inflated salaries of public workers, reduce taxes, and make labor laws more flexible.
Guedes said Sunday he would work to distance Brazil from the Mercosur bloc, which he says is dominated by the leftist governments of nations like Venezuela, and open the country to more globalized trade. He also boasted to reporters that it would be possible to reduce Brazil’s giant budget deficit to zero in the first year of Bolsonaro’s presidency, and that the country would be collecting more than spending by 2020.
But Bolsonaro, a nationalist far-right politician known for his attacks on women, minorities, and institutions, is a recent convert to liberalism. His voting record was often interventionist during his three decades as a legislator in Congress. To many, hiring Guedes seemed like a move to convince the markets that Bolsonaro was the liberal alternative to Haddad—investors feared the more socialist economic policies of the left-wing candidate’s Workers’ Party.
Brazilian analysts appear to be buying into Bolsonaro’s promises (predicting that the Bovespa could jump 45% over the coming year) than foreign watchers, who seem less convinced that Bolsonaro is willing or even capable of delivering that liberal agenda.
But can Bolsonaro be trusted?
“We still have some concerns around Bolsonaro’s Damascene conversion to the cause of free markets,” wrote Schroders analyst Craig Botham, pointing to the fact that many of his advisors oppose reforms, and that Bolsonaro may lack the congressional support to pass those changes.
As Botham notes, Bolsonaro has repeatedly voted against more reform-minded policies in Congress, and has often criticized privatization. The former army captain, known for his violent rhetoric, has even said former Brazilian president Fernando Henrique Cardoso should be shot for privatizing Brazil’s mining giant Vale.
While Guedes has proposed privatizing Brazil’s electric utilities company, Eletrobras, in part to fund his pension reforms and tax cuts, Bolsonaro said during the campaign that he doesn’t want to privatize the state-owned utility. Some generals in Bolsonaro’s inner circle (and there are many) also oppose privatizing major state-owned firms.
The test for Bolsonaro’s promises will come early next year, as he starts to try to move reforms through a fragmented Congress, says ING. But until then, “It should feel like a honeymoon—for a while.”