The São Paulo stock exchange soared by 4.6% and registered a trading peak of $6.5bn in transactions in a single day just after Bolsonaro, who has pledged market friendly policies, came close to clinching an outright victory with 46% of the votes. The dollar also fell by 2.3% on Monday against the real.
Bolsonaro’s left wing opponent Fernando Haddad trailed him by 17 points, and investors feel that Haddad will have too much work to do to be elected in the run-off vote on October 28.
While Bolsonaro’s anti-corruption stance and hard line views on law and order are popular with the electorate, markets have praised the economic programme that was prepared by his main economic adviser Paulo Guedes. “He understands what is to be done,” said Luiz Fernando Figueiredo, a former central bank director and partner at Mauá Capital, an asset management firm in São Paulo. “He has said very clearly that the course [of economic policy] should be corrected. He has pointed to areas where we must act, in terms of pension reforms, in terms of lowering the tax burden and curbing the role of the state,” he said.
The outgoing government has implemented some reforms, including new labour legislation, but it has failed to pass a key pension reform due to lack of support in a fragmented Congress.
Guedes, a former Chicago-trained investment banker, has pledged to restore fiscal discipline and privatise most state-controlled companies, including the oil giant Petrobras, which was at the centre of a huge corruption scandal in recent years. Some 150 companies could be sold or closed down in the coming years, he said, which would bring R$1tr (around $265bn) into public coffers. The sum would be used to reduce debt. The primary budget deficit (equivalent to some 2% of GDP) would be eliminated as early as next year.
WORD OF WARNING
Analysts said the market rally still had some way to go and that bond spreads could narrow further as the political risk declined. Bolsonaro’s small Social Liberal party has become the second largest in the lower house after last Sunday’s legislative elections. But even if he is elected president at the end of the month, Bolsonaro would still have to cement a majority among 30 parties. “The bar for major reforms to tackle the large fiscal deficit is high,” said William Jackson, chief emerging market economist at Capital Economics. “As these hurdles become more apparent, the Bolsonaro boost may start to falter.”
Meanwhile, some Brazilian executives have warned against “market complacency” towards Bolsonaro and his economic chief Guedes. “ His [Guedes’] programme is too radical. His privatisation programme is not politically viable,” said Luis Eduardo Assis, CEO of Fator, a Brazilian insurance company.