Yesterday, the Financial Times provided a helpful point-in-time overview of the Brazilian elections. As I’ve mentioned in the past, this year’s Presidential elections will be Brazil’s most consequential since the election of Lula in 2003, and will be the basis for Brazil’s turnaround in the next decade and beyond.
In my conversations with colleagues, friends, and taxi drivers (usually the best heuristic for a particular pulse of the population), the only consensus I’ve manage to glean is that no one knows what will happen. Recent polling shows that more than 45 per cent of voters are still undecided, with less than five months before the first round of the general elections. Of the presumptive candidates, the largest vote-getter has yet to reach 20%. The race appears to be wide open, with no incumbent, front-running candidate, or presumptive heir to the Presidency / throne.
By all accounts, polls in early 2018 showed Lula as the strong favorite, with approximately 40% of prospective voters opting for the former President. In large part, this was due to Lula’s name recognition and cult of personality, as well as the hope that Lula would be able to recreate the success of his tenure (macroeconomic and exogenous factors aside). After Lula’s arrest in March, which barred him from running in the coming election, many in Brazil’s middle and poorer classes were left without a candidate to put their support behind. Despite Lula’s arrest, a large portion of the Brazilian population still supports Lula, and broadly claim a ‘politicization’ or political motivation behind his arrest. While there is no obvious successor to carry Lula’s mantel, it is likely that whomever he anoints and endorses (whether from within his own party, the Worker’s Party [PT]), or outside of it, will immediately be given a huge lift.
More broadly, whereas recent Presidential elections have made use of via well-organized and -funded political parties, led by the Lula’s PT in recent history, the Lavo Jato corruption scandal has exposed the vast graft and corruption at the heart of the PT, as well as within the other major Brazilian parties, including the Brazilian Democratic Movement (MDB) and Brazilian Social Democracy (PSDB). Far-and-away the consenus amongst all Brazilians (rich, poor, and in between) is removing the incidence and broader culture of corruption in Brazilian politics. This increases the likelihood of th election of an ‘outsider’ or ‘third party’ candidate without the “taint” of corruption on the candidate themselves or the party they represent.
The FT does a good job of outlining the likely leading candidates, including the current frontrunner, the far-right Jair Bolsonaro, the left-leaning Ciro Gomes, the centrist Geraldo Alckmin and the well-known Green Party candidate, Marina Silva. Behind these contenders are entrenched candidates from the current Temer administration, including Finance Minister Henrique Meirelles, and Temer himself, who decided to give up on his first election campaign today (he assumed power after Dilma’s impeachment). None of these candidates provide much in the way of innovative or inspired thinking, and even less so in the way of concrete policy objectives. As an example, Bolsonaro has focused his campaign on improving security in Brazil amidst a sky-high murder rate and concerns about day-to-day safety. His solution? Killing all of the criminals in Brazil.
The backdrop of this election is a country teetering on the brink of an economic turnaround, or a tumble further down the depths of the longest recession in its history. As the FT explains, Brazil’s two key economic issues, resolving its unsustainably bloated pension system and shrinking the role of government to improve Budget deficits (one of the most inefficient in the world relative to its tax collection) must be addressed by the next President. Unfortunately, neither of these are particularly sexy issues, nor are they politically popular, akin to asking the Brazilian voter to “take their medicine” with the hopes of a medium- or long-term payoff (GDP expansion, investor confidence, etc.).
On the other hand, the failure to act on either of these issues will impact public equity and debt markets well before it makes its way to the average Brazilian. As I understand it, the key voting issues of the Brazilian voter were neatly summed up in a recent conversation I had with a political scientist: (s)he want to have a job to go to (employment), wants to get to work in a timely fashion (transportation), and doesn’t want their wallet to be stolen in the process (security). These issues all fit neatly near the base of Maslow’s Pyramid, and reflect the need for Brazil to improve on base-level indicators before it can think about re-assuming the mantle of regional or global political leadership.
Looking from the outside in, it’s fairly easy to imagine the unimaginable here in Brazil: the victory of the brash, violent, homophobic and misogynistic Bolsonaro. While Bolsonaro continues to lead in the polls, the feeling that he will be unseated by a more sane, middle-of-the-round candidate continues, even though no name comes to mind when asked who that candidate might be. The common reaction of Brazilians that I’ve spoken with when I’ve raised this likelihood has been eerily similar to the one that I would’ve had leading up to Trump’s election: It couldn’t happen. He’s an incredibly loose cannon. He’s an interventionist, and someone who has actively called for a return of Brazil’s military dictatorship. And have you heard the things he’s said about women, gay people, criminals, etc. etc.? He’ll bring the country back to the dark ages! Americans are likely to find these appeals and rationales familiar, and remember the odd, surreal feeling to wake up the morning after the election to seemingly dystopic newspaper headlines: Trump Wins in Historic Upset.
One thing that I’ve been pondering quite a bit is how to think about Democratice Presidential elections in the wake of Trump’s victory. By all accounts, Trump’s victory was a failure of polling, and data more broadly. Just one election after 538 founder Nate Silver’s victory lap and his proclamation on the inevitability of data in understanding political elections, data was proven to be wholly inadequate in capturing the outcome of the election. I’ll never forget following the election online and on television, beginning the night with Kellyanne Conway’s near-concession speech, only to witness a complete reversal of the odds as the evening wore on. This graphic from the NYTimes accurately captures the dramatic one-eighty.
Source: NYTimes Live Presidential Forecast
While I do think it is important to translate the experience and lessons learned in the US (and the UK) elsewhere, there is always a certain danger in conflating different countries, political systems, and situations. As Nassim Taleb has explained over and over again, ‘black swans’ take place much more often than they’re probabilistically assumed to occur, and should therefore be considered, to the extent that they’re known ahead of time. In this case, there’s a strange cognitive dissonance taking place, whereby the actual data is showing a most-likely outcome that the general public has to-date refused to accept as possible, unlike the more commonly occuring reverse: an unlikely outcome that people irrationally believe to be more likely that it actually is.
There are several principle dynamics that differentiate Brazil’s Presidential election from the United States that are worthy of consideration:
1. Compulsory voting: Brazil is the largest country in the world to impose compulsory voting on its citizens. Despite penalities levied against non-voters, around 80% of the population votes in the Presidential election. This means that the complacent or uninformed voter plays a larger role than in non-compulsory situations such as the US.
My hypothesis would be that this could result in a larger-than-expected turnout for the candidates that get the most media attention (including social media) and / or offer the most ‘sound-bite-able’ clips.
2. Two Round system: Somewhat differently than the primary system, Brazil has a two-round Presidential election whereby the electorate chooses between a broad field of candidates from across the political spectrum in the first round (October 7, 2018), with the top two victors vying for the Presidency just three weeks later in the same month (October 28, 2018) (interestingly, in the unlikely scenario that the top candidate in the first round receives >50% of the overall vote, he or she is declared elected, without a second round. In that short timespan, the unelected Presidential candidates will throw their weight behind one of the two victors, and begin the process of coalition building.
My hypothesis would be that the more centrist, and well-established of the remaining two candidates would be able to leverage their existing connections and party infrastructure to reign in votes from the first round field. In the event that Bolsonaro makes it to the second round, he will likely be more extreme and less organized than the opposing candidate, and thereby stands a lower chance of success.
ADVANTAGE: The Field
3. Mandatory TV time: Brazilian elections, like many across the developing world, make extensive use of television time and public funds as a part of the campaign. As The Economist explains, how much public money and free television time each Presidential candidate receives depends on the congressional strength of his or her coalition and / or party. This would dampen the bullhorn of an outsider candidate with little political infrastructure, who would have comparatively much less television time and funds to campaign with. One caveat is that this does not account for social media, however, of which Brazilians are significantly active relative to other countries.
My hypothesis would significantly weigh the importance of social media, and therefore would more or less nullify the importance of this impact.
It will be interesting to see how things proceed from here – how the populace’s disposition changes and how the market reacts as the elections come closer. The Brazilian Real exchange rate to the Euro and Dollar have moved more-or-less in lockstep up until recently, which indicates to me there is a “Trump” effect from his actions to strengthen the Dollar, as well as a broader consensus on the precieved weakness of the Brazilian economy and / or the ongoing political uncertainty. Personally, I expect there to only be further devaluation in the coming months (NB: I’m far from a knowledage FX trader / investor).
Source: Yahoo Finance
One wild card to add to the mix is the upcoming World Cup this summer, which will likely serve as a distraction that will keep the media and average Brazilian away from the political newscycle for the majority of the summer. I’m curious to continue to track this election over the next few months, and am excited to continue to document things as they evolve.