Sixteen years ago, former union leader Luiz Inácio Lula da Silva led all opinion polls – and financial markets went bananas. A Goldman Sachs analyst created the Lulameter, “a model to quantify the probability of a Lula victory that was being priced by currency markets.” Mega-investor George Soros said that Brazil faced a choice between Social Democracy Party candidate José Serra and chaos.
Well, the groundhog hasn’t come out of his den, and it’s 2002 all over again.
Since last week, Brazilian markets have become extremely volatile, as multiple presidential polls showed Lula is still ahead. While the former president will likely be out of the picture by next month, his kingmaking ability has been attested by the rise of understudy Fernando Haddad in scenarios without Lula.
The stock market crashed and the value of the Brazilian Real against the U.S. Dollar went down, with the American currency breaking the BRL 4 barrier. It was the first time this has happened since 2016, when Brazil was impeaching its president.
Since Monday, when Ibope published its poll, the Brazilian currency has devalued 4.4 percent. Only six other currencies have lost more value this year. Plus, a study by investment bank XP predicts that if the Workers’ Party wins again, São Paulo’s most important stock exchange will drop from the current 76,000 points to below 55,000 points.
And things can even get worse. According to an economist </span><a href="https://g1.globo.com/economia/noticia/2018/08/22/cotacao-do-dolar-em-22082018.ghtml"><span style="font-weight: 400;">interviewed by </span><i><span style="font-weight: 400;">G1</span></i></a><span style="font-weight: 400;">, it is possible that the dollar will reach BRL 4.50 without a true reformist candidate in the runoff stage.</span></p>
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<p><span style="font-weight: 400;"><img class="alignnone size-large wp-image-7849" src="https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA-1024x426.png" alt="brazilian real currency us dollar" width="1024" height="426" srcset="https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA-1024x426.png 1024w, https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA-300x125.png 300w, https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA-768x319.png 768w, https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA-610x254.png 610w, https://brazilian.report/wp-content/uploads/2018/08/export-7ZntA.png 1250w" sizes="(max-width: 1024px) 100vw, 1024px" /></span></p>
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<h2>What are the markets afraid of?</h2>
<p><span style="font-weight: 400;">Financial investors are unhappy with the Workers’ Party’s lingering electoral strength because of its economic agenda. Lula and his fellow party members have been vocal critics of President Michel Temer’s economic reforms – especially those regarding labor laws and the proposal for an overhaul of the </span><a href="https://brazilian.report/money/2017/12/14/pension-system-reform-challenge-brazil/"><span style="font-weight: 400;">pension system</span></a><span style="font-weight: 400;">.</span></p>
<p><span style="font-weight: 400;">Big finance would rather have a more “pro-business” candidate leading the polls, someone who’d be friendlier to their interests. Someone like Social Democracy Party candidate Geraldo Alckmin (who said he will keep the course of the economy in the same direction if elected), or Henrique Meirelles (Mr. Temer’s former Finance minister).</span></p>
<p><span style="font-weight: 400;">Coupled with the Workers’ Party potential is the fact that the candidate in second place is not completely aligned with what investors want. Jair Bolsonaro’s past is filled with ultra-nationalist and statist views on how the economy should be run. To polish his image, he has chosen a Chicago School economist as his top advisor, but the stock market index showed he has yet to win over investors.</span></p>
<h2>Is the fear of Lula warranted?</h2>
<p><span style="font-weight: 400;">Back in 2002, when the economy was going wild at the prospect of a Lula victory, the Workers’ Party released a document promising not to promote radical shifts in economic policy, and meet all previous commitments to international creditors. The so-called “Letter to the Brazilian People” appeased financial and industrial moguls and was an important step in Lula’s rise to success. </span></p>
<p><span style="font-weight: 400;">Although the markets seem distressed by the possibility of having Lula run the country once more, this panic seems unwarranted. Lula is far from being an economic radical. Many of the policies initiated during Fernando Henrique Cardoso’s government were maintained during the Workers’ Party era. Speaking at a rally in 2016, Lula boasted that banks “never profited as much as they did during [his] government.”</span></p>
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<p><img class="alignnone size-large wp-image-7847" src="https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1-1024x747.png" alt="brazilian real currency us dollar banks profits" width="1024" height="747" srcset="https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1-1024x747.png 1024w, https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1-300x219.png 300w, https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1-768x561.png 768w, https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1-610x445.png 610w, https://brazilian.report/wp-content/uploads/2018/08/export-RleaS-1.png 1096w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
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<p><img class="alignnone size-large wp-image-7848" src="https://brazilian.report/wp-content/uploads/2018/08/export-f4235-1024x585.png" alt="brazilian real currency us dollar banks profits stock market" width="1024" height="585" srcset="https://brazilian.report/wp-content/uploads/2018/08/export-f4235-1024x585.png 1024w, https://brazilian.report/wp-content/uploads/2018/08/export-f4235-300x171.png 300w, https://brazilian.report/wp-content/uploads/2018/08/export-f4235-768x439.png 768w, https://brazilian.report/wp-content/uploads/2018/08/export-f4235-610x349.png 610w, https://brazilian.report/wp-content/uploads/2018/08/export-f4235.png 1400w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
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<p><span style="font-weight: 400;">Also, Mr. Haddad – who will eventually run for president in Lula’s place – is a moderate. During his only experience in public office, as Mayor of São Paulo, he reduced the city’s debt from BRL 74bn to BRL 27.5bn in four years, increasing the city’s investment capacity. While his time in office was far from perfect, he was by no means a spendthrift</span><span style="font-weight: 400;">.</span></p>
<p><span style="font-weight: 400;">The electoral program the Workers’ Party presented this year – and which Mr. Haddad oversaw – has interesting ideas, such as the introduction of a carbon tax and the simplification of the tax system.</span></p>
<p><span style="font-weight: 400;">Political columnist Bernardo Mello Franco called the market’s reactions “electoral terrorism.” He wrote in 2017: “The trick is to replace the opinion of millions of voters by the desire of a handful of financiers. It’s a game where the bank always wins.” </span></p>
<p><span style="font-weight: 400;">It is a fact that the 2018 elections seem very uncertain and predictions about its outcomes seem irresponsible. But none of the candidates that have chances of getting elected seem like an actual threat to the financial market.
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Lula still strikes fear.
