In 1960 the Gross Domestic Product per capita of South Korea
was US$158. By 2016 it had grown to US$27,539. Over the same period, the numbers for Brazil
were US$210 and US$8,650[1].
Adjusting for purchasing power parity doesn’t change the
picture much. Over the 1990-2017 period, and in constant US dollars of 2011, the
results were US$11,633-US$35,938 for South Korea and US$10,345-US$14,103[2] for
Brazil.
Discounting the drag caused by its much larger population and
looking at overall country GDP data, Brazil still underperformed: over the 1960-2016
period, its GDP grew from US$15.2 billion to US$2.05 trillion (+13,453%) while
South Korea’s grew from US$4 billion to US$ 1.53 trillion (+38,576%).
Fast forward to 2018. Brazil
is in the last stages of the biggest corruption scandal of its history, the
so-called Lava Jato/Car Wash, which sent a former president and
many political leaders from the left, right and center to jail; for the first
time in years, active and retired military leaders are raising their voices to
warn against further institutional and judicial drift; crime and personal security
are foremost among the population’s concerns; and a key presidential election is
less than two months away.
What
next? Is the wheel about to turn, and if
so, which way?
Two polls reveal the true dimension of the next president’s
challenge:§ 92 % of Brazilians believe that the judicial system treats the rich better than the poor, and
§ As recently as August 22, former president Lula, who remains in jail for corruption, led voting preferences with 39%[3].
In September, two events shook the already atypical presidential
campaign: 1) former president Lula was ruled ineligible and his party, the PT,
named Fernando Haddad as his replacement, and 2) Jair Bolsonaro, the rightwing
candidate who was running second to Lula, was the victim of an attempt on his life
and will remain hospitalized for several weeks.
Most candidates have a familiarity deficit with the
population. As of September 9, the
following table shows that less than 1/3 of the population knew the main candidates
“very well” and about half knew them “very well” or “a little”:|
|
Geraldo
Alckmin
|
Jair
Bolsonaro
|
Ciro
Gomes
|
Fernando
Haddad
|
Henrique
Meirelles
|
Marina
Silva
|
|
Knows very well
|
30%
|
29%
|
25%
|
17%
|
13%
|
27%
|
|
Knows a little
|
29%
|
23%
|
29%
|
21%
|
19%
|
32%
|
|
TOTAL
|
59%
|
52%
|
54%
|
38%
|
32%
|
59%
|
The PT and Fernando Haddad face a challenge: how to make the
candidate from Sao Paulo nationally known without having him appear as a mere
stand-in for Lula.
The other candidates face another kind of challenge: better
known because they have been in politics longer and/or have already ran for the
presidency, they also represent the “political
establishment” which many voters distrust.
A relatively new comer on the national stage, Bolsonaro is now
enjoying a rise in sympathy for having been stabbed, but over the next few
weeks his ratings will likely suffer from diminished exposure and his inability
to campaign in person.
The absence of a clear leader in the polls also reflects
voters’ indecision: 55% of respondents
declared themselves set in their choices vs. 80% in 2010 and 2006 and 70% in
2002 and 2014[4].
Political cleavages and history make it difficult to imagine
the right or the left easily uniting behind one candidate in the second round. Bolsonaro and his small party, the PSL, haven’t
much in common with Alckmin and his traditional center coalition; the PT has
historically refused to join any coalition that it didn’t lead, and Ciro Gomes
so far has not been welcome. This also leaves Marina Silva, the best presidential
candidate from the left in my view, out in the cold.
Can we
make the outlook hazier for investors? Sure we can!
There is evidence that voters are ambivalent regarding needed
economic reforms. While Alckmin appears
set to privatize many the state-owned enterprises, unions have often gone to
court to block past privatizations, congress has been loath to let go of its
patronage, and the public appears reluctant to see Petrobras privatized, even
after the massive scandal that nearly bankrupted the company.
Apart from the PT, party discipline is weak in Brazil, making
governing difficult and reforming very difficult. This is unlikely to change this time around. Even if Haddad wins, there will inevitably be
tensions between him and Lula and their respective followers as the new leader
seeks to establish himself[5].
More importantly, the diverging economic paths followed by
Brazil and South Korea over the last 50 years reflect profound differences in
history and culture. These two factors
are powerful and resilient, and not limited to these two countries. For a while, leaders can overcome them, as FH
Cardoso did in Brazil or Kemal Ataturk did in Turkey, but the forces to undo or
blunt deep reforms are strong, ever present, and in the end often overwhelming.
The
operating horizon for traders and even most investors in emerging countries is
short; in Brazil, not everything is negative.
For example, the Lava
Jato scandal is fresh in every memory and one can expect governments and
politicians to be more careful with public assets for the foreseeable future.
Most candidates must realize that they lack broad popular
support and that further dividing the population once in office would be a
national disaster and politically risky.
With Lula absent from the ballots and Bolsonero in the hospital, it is
close to 60% of the voters’ first choices which are gone or in jeopardy.
The presidential elections will be decided by October 28 at
the latest. While the race is wide open,
it wouldn’t surprise me if Fernando Haddad, with the well-organized support of
the PT and of Lula himself, were to reach the second round and face Jair
Bolsonaro. If he failed, it could be
because Ciro Gomes rallied more of traditional voters from the Left.
In a second round, the outcome of a Bolsonaro/Haddad or
Bolsonaro/Gomes race is a toss-up at this stage.
These are two among several scenarios, though unless the
campaign dynamics change appreciably, they are the most likely for me.
Brazilian stocks are not off-limit in the absolute, but either
current prices fall further to reflect the inherent risks of this election or any
buying decision should be delayed until after the second round is over, in my
view.
The future always appears unclear, but the past is not and is
as good a guide of things to come as any.
Days of Future Passed as the Moody Blues would say.
