Brazil’s 2022 general elections: first impressions

As a culmination of a busy election cycle in Latin America over the past couple of years, 124 million Brazilians headed peacefully to the ballot boxes last Sunday. And they voted à la grande, not only for president, but also to elect all the country’s 27 state governors, 27 senators (one third of the Federal Senate), 513 federal deputies (the entire House of Representatives) and the whole lot of state representatives, 1,059, for the respective Legislative Assemblies. Thanks to Brazil’s national electronic voting system, the consolidated results could be released on the same day.

Without a hint of doubt, all eyes were on the presidential contest. Yet to better understand Brazil’s convoluted politics, it is crucial to understand first what happened in the congressional elections. Contrary to conventional wisdom, the Legislative branch is very powerful in Brazil and, along with the Judiciary, is not subordinate to the Executive, so much so that lawmakers have impeached two presidents since the end of the military ruling in the mid 1980s. The picture that emerged from the (electronic) ballot boxes was unequivocal and consolidated a trend observed at least since 2010: conservative parties gained further ground and now hold around half of the seats in Congress, which compares to a share of 20% to 25% of their leftist opponents (Charts I & II). Centrist and independent forces therefore control the remaining quarter or so of the House of Deputies and the Federal Senate, being pivotal to the building of any functional ruling coalition that aims at passing fundamental reforms, which require a super qualified majority (three fifths). More importantly, they will not support radical departures from prevailing socioeconomic arrangements. Although Brazil’s political system remains fragmented (there are no less than 32 organizations registered at the Superior Electoral Court), in the end a smaller group of nine parties runs the show and there is quite a lot of consolidation going on among them. For instance, two of the most important right-wingers, the Progressist Party (PP) and União Brasil, are in advanced negotiations to merge themselves into one single institution. Because the resulting arrangements favor more stable alliances, they bode well for governability.

Against this backdrop, the presidential contest was the most polarized since 1989 and produced a tighter-than expected first-ballot result. For one, it was the first time in Brazil’s recent history that a former president challenged the incumbent. For another, the two contenders are highly charismatic, if deeply controversial, candidates. Because President Bolsonaro performed better than anticipated (43% of valid votes, which compares to an average of 38% in the polls), there will be a runoff on October 30th. Former President Lula, who collected 48% of the vote, is favored to win, since he only needs to muster two million more votes to triumph, while his adversary must find an additional seven million votes. But then Lula, always prescient, had anticipated the Congress drifting further to the right, and preemptively built an ample coalition that included a broad centrist component. His running mate, for example, is a former center-right politician four times elected governor of the wealthy state of Sao Paulo, who challenged Lula’s 2006 reelection bid. Indeed, the former president positioned himself as the moderate candidate that would correct the conservative excesses of the incumbent head of the executive branch in sensitive areas like environment protection, civil rights, and healthcare.

As intriguing as these momentous political events are the latest economic developments in Brazil. Despite worsening global conditions, leading indicators of activity suggest that GDP growth accelerated to an annualized real rate close to 5% in the third quarter, from 3.5% to 4% over the previous months (Chart III). That such an uptick occurred after the central bank’s policy rate escalated from 2% p.a. in early 2021 to the double digits in 2022 speaks volumes about the country’s domestic fundamentals. A timely tightening of monetary policy cooled down an overheating economy, whereas the comparatively lower levels of indebtedness relieved the financial distress of the public and private sectors. The year-on-year change in the nationwide CPI is now showing a definite declining trend and upbeat business sentiment is spurring net job creation, which explains the apparent paradox of disinflation along with falling joblessness (Chart IV). Accordingly, future markets and the yield curve are anticipating a cycle of monetary easing that would begin in March or April 2023. It also helps that the consolidated government is running a budget surplus of 2% of GDP before interest payments and that net foreign direct investment is growing 46% over a year ago, therefore more than compensating for unstable short-term capital flows.¹ Improved fiscal health and solid balance of payments accounts are mitigating the adverse effects of global gyrations.

Admittedly, various macroeconomic and asset prices in Brazil are still discounting the future at a high rate owing to lingering uncertainties. As a result, valuations oftentimes do not seem to make much sense. For instance, the earnings growth (last 12 months) of the Bovespa stock market was nearly 50% up to the second quarter of this year, however the multiple enterprise value to EbITDA was a slim 4.2 times, 35% below its long-term average². Similarly, the real effective exchange rate has appreciated against the U.S. dollar by 9% since December 31st, 2021, and yet it was 28% undervalued, according to purchasing power parity estimates. While current global conditions remain challenging, local investor sentiment usually improves when the end of Brazilian elections removes the political apprehensions. There are rational grounds to believe that this phenomenon will occur again. There is no need to pass emergency reforms to stabilize the economy and the policy priorities of both Lula and Bolsonaro are widely known.

¹ Public sector borrowing requirements, primary concept, through August 2022 and net foreign direct investment inflow through July 2022.

² EV/EbITDA calculated since 2005.

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