Brazil’s UBS BB sees potential dispute between Bolsonaro and Lula in 2022 election; projects market anxiety

RIO DE JANEIRO, BRAZIL – Outlining a preliminary scenario of the 2022 elections and its potential impact on markets, Fabio Ramos and Alexandre de Azara, economists at UBS BB, believe a runoff between President Jair Bolsonaro and ex-president Luiz Inácio Lula da Silva is more likely.

The UBS BB economists further point out that as the pandemic subsides, they see that the market’s focus is shifting to the elections. “For the first time, Brazil may be faced with a choice between a sitting President and a former one,” they point out.

There is increased anxiety in the market on this point, most likely due to heightened fiscal risks.

“The term structure [of the yield curve] shows that inflation expectations are up for the long term. We attribute this to the potential fiscal risks associated with election uncertainties,” the economists point out.

This is because it is unclear how the main candidates would handle high public debt and fiscal rules (mainly the Fiscal Responsibility Law and the Spending Cap).

The assessment is that there is no room for fiscal maneuvering in this field. “Public debt is already high compared to other emerging economies, thereby making financial conditions and the economy more vulnerable to fiscal setbacks.”

They point out that left-wing leaders have been critical of the fiscal rules, while in the right-wing arena, proposals and commitment to long-term fiscal consolidation are still unclear. “As long as uncertainty lingers, it is difficult to expect strong economic performance for 2022. We recently revised our GDP estimate for 2022 from 2.5% to 2%,” they point out.

However, the economic situation in Brazil will be at the heart of the electoral dispute, according to the economists.

In any case, the investment bank advocates the maintenance of fiscal responsibility by whoever wins the presidential elections, due to this commitment’s positive impact on growth, inflation, and the interest curve.

As for the electoral scenario, Ramos and Azara believe it is unlikely that Lula will be convicted again by the courts to the point of preventing him from running in the 2022 election. Nevertheless, they see some room for the so-called third route, considering that between 45% and 55% of the electorate is more “fluid” and the two main candidates have high disapproval rates.

The institution recalls that Bolsonaro’s approval stands between 25% and 33%, lower when compared to other presidents seeking re-election. The economists also point out the importance of the economic debate in this dispute, in line with most electoral races.

“Economic conditions play a critical role in elections. We think this is also true in Brazil. And the current assessment of the federal government is at its lowest in the mandate,” they assess.

They also see that there are sensitive economic issues on the radar, such as the inflationary process and the slow rebound of the labor market. “We expect consumer confidence to improve in the coming months. However, it is unclear whether, or to what extent, this may increase the population’s rating of the government,” they say.