Written By: Steven Winter – International Director
Recent years have turned Brazil’s political and economic spheres into a tangled mess. Economically, the country has yet to recover from the commodity price collapse in 2014. The collapse—due in part to a slowdown in Chinese demand—saw Brazil’s exports drop from a high of US$287 billion in 2013 to the 2016 low of $224 billion. With the country’s top exports comprising soybeans, iron ore and raw sugar, the fall in prices for raw materials was an impending failure in the country’s economic performance. However, a simultaneous collapse in oil prices provided a gut punch to public revenue. With crude petroleum accounting for $11.8 billion, the fallout in oil prices exacerbated the country’s economic turmoil. The ensuing economic impacts resulted in Brazil’s worst recession in recent history. Latin America’s largest economy, with a formidable foreign-direct-investment (FDI) sector and deep foreign reserves, saw growth turn—and remain—negative until its first positive uptick in the first quarter of 2017. In 2015, gross domestic product (GDP) contracted by 3.8 percent and was expected to fall by another 3 percent in 2016. Contrast this with the record annual 4.5 percent growth witnessed during the commodity super-cycle, and it’s clear how negatively the country has been impacted. Adding to these issues is a runaway inflation rate, which was recorded at 10.7 percent in December 2016, and an unemployment rate of 12 percent. Most importantly, consumption and investment have been thrown into disarray thanks to the economic uncertainty plaguing the country. But the uncertainty is not benignly attributed to the political sphere.
The stability of Brazil’s political establishment was shaken by the Lava Jato (Operation Car Wash) corruption investigation that started in March of 2014. The investigations have implicated political leaders of all stripes and at every level of government. Corruption and bribery charges have been laid against top politicians; most notably, former President Luiz Inácio Lula da Silva and current President Michel Temer. The trouble began in August 2016, when the Brazilian National Congress chose to impeach Temer’s predecessor, Dilma Rousseff. Her charge, fiscal misdemeanours, had little to do with the Lava Jato investigations, which caused many to call the impeachment a coup against the government. Upon Rousseff’s impeachment, Temer—who served as her vice president—took office, which marked a leftward shift in policy and government management. He sought to liberalize much of the economy and attract foreign investment back to the country through economic reforms that would establish a favorable investment environment. Despite his push for fiscal reforms, Temer has run into a myriad of roadblocks. A politically divided Congress is unwilling to allow the speedy passage of reforms. And his popularity has tanked, hovering somewhere near 10 percent at any given time. While Temer faces an uncooperative Congress, daily street protesters cry out for his ouster. To add to his concerns, Temer has now come under the scrutinizing gaze of Judge Sérgio Moro, who leads the Lava Jato investigations, for his role in the corruption and bribery scandal currently dismantling Brazil’s political elite. While Temer has survived his investigations relatively unscathed, the potential for him to find himself in office this coming election is almost nonexistent.
This is not for structural reasons. Brazil allows a candidate two consecutive presidential terms. Presidents must then be out of office for one four-year term before they can be elected to office again. Temer’s inheritance of the presidency suggests that he may be eligible for two consecutive terms after the end of his current tenure. But popular discontent effectively eliminates him from the elections on October 7, 2018. If any candidate is unable to garner 50 percent or more of the popular vote in this first round of voting, a runoff election will be held on October 28, 2018, between the two top-performing candidates. Along with a new president, the elections will elect a new vice president, 513 members of the Chamber of Deputies, 27 governors, 54 senators and 1,059 state legislators. The race is further complicated by the corruption scandal sweeping the country. With many disenfranchised with the political elite, there has developed a populist fever that could open the presidency to a political outsider. The political uncertainty has blown the election wide open, turning would-be presidents into unthinkable candidates.
At present, former President Luiz Inácio Lula da Silva, or simply Lula, stands at the head of polling with 30 percent of the first-round voter intention. While not enough to walk away with the election, it is certainly enough to secure his place in the second-round of elections; but a few obstacles complicate the perceived ease of his candidacy. Firstly, while Lula holds the highest support in polls, he also commands the highest rejection rate of any candidate. Thus, a second-round showing for Lula may unite his opposition against him. Secondly, Lula was recently convicted of accepting $1.15 million in bribes from engineering firm OAS. While he is currently appealing the decision by Judge Moro, if his conviction is upheld, Lula will be barred from running for office. In fact, he would face a 10-year ban on running for public office, which he would serve upon completing his jail time. Nonetheless, if Lula is allowed to run, he will most likely win a third term in office, as most simulations see him winning both rounds.
Lula’s closest rival is Marina Silva, his former environment minister and head of the REDE (Rede Sustentabilidade) Party. Silva has effectively positioned herself as the “green” candidate, strong on environmental issues. She came in third in the last two presidential elections, and, with many of her long-time electoral rivals out of the way, she stands a chance to not only make it to the second round of elections but even win the election. Her prioritization of environmental issues makes many in the political establishment concerned that she may disrupt the current reform agenda. Ultimately, she would need to ally with one of the larger parties to facilitate the passage of her policy platform. Analysts are concerned that her soft-spoken demeanor may not allow her to tap into the populist fervor that could usher a political outsider into power. However, if Lula is kept out of the race for legal reasons, the election is hers to lose.
The growing right-wing voter base in Brazil may be more drawn to conservative candidate Jair Bolsonaro of the Partido Social Cristão (PSC). Bolsonaro has railed against the corrupt political elite and the “moral decadence” of the country. His populist rhetoric has garnered him 15 percent of the vote in polls, with his flat-out opposition to Temer’s social security and labor reforms. However, his radical-right approach may be too far a shift for many voters who cannot stomach parts of his agenda, which includes an affinity for torture and a rejection of the homosexual community. While he may make it past the first round of elections, his high rejection rate would certainly keep him out of office. Other candidates, such as Ciro Gomes and Joao Doria, could be better positioned to capitalize on anti-establishment sentiment. Both are better positioned to play a dark horse in the race as they are both successful businessmen who many would see as a refreshing change from the corruption-plagued government.
While it is too soon to tell, the most likely outcome is a Lula victory if he is allowed to run, and a Silva victory in the event he is not. Lula’s brand of leftist policies saw an increase in FDI, which he used as a redistributive tool for the country’s poor. The effectiveness of this was the simultaneous occurrence of sound macroeconomic policy, record growth and unprecedented popularity amongst the Brazilian populace. Lula would likely seek to implement the fiscal reform to lower inflation and relax monetary easing. This would likely restore economic and political stability, and increase investor confidence in the country. While the country is not able to improve its export economy, improving investment is the best way to counteract the effects of the current conditions. This plan is not unlike the reforms currently pursued by Temer and the Partido do Movimento Democrático Brasileiro (PMDB). Coincidentally, Temer’s PMDB is the party with which Silva would most likely ally in the event she found herself in office. She is not entirely against these reforms, and her focus on environmental policy suggests that she would not place too much weight on changing the direction of the reforms. Ultimately, the country would see the implementation of much-needed reforms but would miss out on the austerity measures many believe are necessary to a full recovery.
Nonetheless, well over a year stands between now and election day. The first development to watch is whether Lula’s conviction is upheld or overturned. If the conviction is overturned, then expect a third Lula presidency. If the conviction is upheld, expect Silva to finally take office after milling about the periphery of power these past few elections.