While Brazilians prepare to vote in the second round of their presidential election on Sunday, Jair Bolsonaro is getting ready to become president. The far-right candidate has been leading in the polls, but investors worry what his victory could mean for the future of Brazil’s much-needed reforms.
The Datafolha poll published late Thursday showed Bolsonaro in the lead with 56%, according to a Reuters report, compared with run-off rival Fernando Haddad’s 44%. Haddad has been endorsed by disgraced former President Luiz Inácio Lula da Silva. The distance between the two candidates has narrowed of late.
Bolsonaro, who was injured in a knife attack during the campaign, is known for his extreme rhetoric and has promised among other things to scrap environmental protections and agricultural restrictions in the Amazon. Brazil is a big agricultural producer with one of its biggest exports being soybeans SF9, +0.35% .
“A Bolsonaro win in Sunday’s election is fully priced [in],” wrote RBC’s chief currency strategist, Adam Cole, on Friday, citing a 95% likelihood of his winning predicted by the market. “After the election, markets will have to think about the real likelihood of reforms, and there is plenty of room for disappointment, in our view.”
Brazil has been in need of public-finance reform, including of its pension system, for years, and previous leaders have struggled with the problem for years. Now the issue is being passed on to the next president — most likely Bolsonaro.
“While the market has reacted positively to the first-round result, uncertainty remains with regard to the pace and scope of fiscal reforms (including the social-security reform) that can be implemented by the next administration in light of Brazil’s large fiscal deficit and rising debt burden, and the heavy burden of mandatory spending,” wrote Shelly Shetty, senior director of sovereigns at Fitch Ratings, earlier this month.
On top of that, Brazil is sensitive to rising interest rates in the U.S. but also to a slowdown in China’s economy. Beijing reported its third-quarter GDP growth at the lowest pace since the great financial crisis last week.
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If fiscal and structural reforms should disappoint investors, the U.S. dollar could move back to 4.20 against the Brazilian real USDBRL, -1.7108% , according to RBC. On Friday, a dollar bought 3.6430 real.
In the year so far, the greenback has rallied some 10% against the real, according to FactSet, as it was also affected by strength in its U.S. rival, as well as a selloff across emerging-markets assets, particularly in the second quarter.
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