Brazilian politics has always been a bruising contact sport, but the upcoming October 7th elections are even more of a rollercoaster than usual.  The highlights are:

• Lula remains the electoral favorite, but several subsequent court decisions won’t let him run, so his PT (Worker’s Party) is running Fernando Haddad as his potential surrogate. Under Brazilian law, political parties only have to decide on their final candidate ten days before the election. The PT is hoping that they can get Lula out (unlikely) and, if not, that Lula supporters will transfer their votes wholesale to Fernando Haddad (likely).
• In second place is Jair Bolsonaro, a not-so-thinly veiled militant fascist: wants further militarization of law enforcement, and is renowned for provocative sexist, racist and homophobic statements. He is a byproduct of the extreme polarization in the wake of the Lava Jato corruption scandal, that hit the left-wing PT particularly hard. 
• The centrist number 3 candidate is Gerardo Alckmin. Though he is in Asymmetrica’s view the most stabilizing candidate (pro-business, good on security, but socially liberal and inclusive), he continues to trail. 

But Bolsonaro’s candidacy just got a big boost yesterday, when Brazilian politics got bruising for real: he was stabbed at a rally in Minas Gerais. He is already benefitting from a Messianic aura, as a consequence, abetted by his own Tweet thanking God and the people’s prayers for him. Yes, that plays well in Catholic Brazil. 

The markets generally prefer his policies to those of the left-wing PT, but they are jumpy — not on the currency, but on the bond yield. Our Predata signals put the risk of a major yield move in the next seven days at a whopping 3.72 sigmas. That’s down from 3.9 sigmas before the Bolsonaro stabbing.

What is going on here?

The massive Lava Jato anti-corruption net has impacted an already stagnant economy. When I was in Brasilia last week, a well-regarded advisor to Pres. Temer informed me it has resulted in over 1 million Brazilians losing their jobs, as their companies were penalized, sanctioned or closed. Brazil also has rising debt and is in need of effective labor and pension reform to ease the public debt burden.

Pres. Temer tried to enact both of these, but his initiatives have been stymied by a Supreme Court that has become nearly all-powerful — to the detriment of the other branches of government: as a consequence of the Lava Jato prosecutions, it has positioned itself as the only credible political arbiter. Not all Brazilians see it this way, though. 

So while the markets may be betting on who will likely win the upcoming election and pegging their hopes of monetary and fiscal reform on that person, they would be better served to see how any new president-elect would intersect with the Supreme Court. The court’s decisions have hitherto shown a predilection for the right (which would suit Bolsonaro), but their lack of support for the two key reforms (labor and pension) speaks to their own vested interest: pension reform would impoverish the justices themselves; most of those senior justices are launching political careers, and labor reform would be unpopular with their would-be constituents. 

One of the commonly accepted aspects of the definition of an emerging market is one where market mechanisms are developed, but still subject to political changes and trends. Brazil’s current political and economic climate fits that. A rather common refrain about Brazil amongst EM analysts is that Brazil is the country of the future and always will be. Let’s hope at least that after next’s months elections it becomes the land of economic prudence and political balance.  

Dr. Vanessa Neumann is the president and founder of Asymmetrica and author of “Blood Profits: How American Consumers Unwittingly Fund Terrorists,” whose Brazilian edition will launch in late November 2018.

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