Bolsonaro's Brazil: what does it mean for corporates?

President-elect Jair Bolsonaro and his outwardly pro-business policy platform are the “least worst” choice for corporates. In the short-term, we expect quick wins with reforms that only need a simple majority in Congress. These reforms will appeal to a broad pro-business and conservative audience. The positive confidence shock could add roughly +0.3pp to economic growth over the next year. Bolsonaro’s business environment reform could also lead to the creation of 90 000 additional companies in 2019 compared to 2018.

 

Yet, the relief for corporates could be short-lived. The comeback of market volatility and increase in risk premium, and hence borrowing costs, is right around the corner, for three reasons:

  • Unrealistic or vague proposals: Bolsonaro’s economic program contains no impact assessments. This could unnerve markets should he not detail his plan before taking office. Besides, his key budget proposal (to reach primary fiscal balance in 2019) is unrealistic. It involves a huge fiscal adjustment of 2.4% of GDP. Such austerity could cut as much as -1.2pp to real GDP growth in a year, while Brazil’s yearly growth rate is currently barely above +1.3%.
  • Governability issues: Likely to arise in Congress, delaying the critical pension reform. Bolsonaro would need between ~ 60% and 80% of votes from outside his coalition and opposition to pass a pension overhaul in Congress.
  • “Brazil first” and instability of the policy platform: A resurgence of Bolsonaro’s interventionist and nationalist past would jeopardize the orthodox agenda.

 

What does it mean for corporates? In the context of an underwhelming outlook for economic growth in Brazil (+2.5% in 2019), and shrinking global liquidity, corporates are not home and dry yet.

  • Governability issues and stalling debates on pensions would lead to an increase in Brazil’s risk premium, putting corporate debt at risk[1]. On the watch list is the retail sector, which has the highest share of debt at risk (58.4%), followed by automotive suppliers (47.8%), textiles (43.5%), food (38.2%) and energy (9.2% but highest nominal value USD18.2bn).
  • Uncertainty surrounding the economic program and its feasibility could also trigger a currency depreciation. This would hurt foreign-input dependent sectors: transport equipment, household equipment, machinery and equipment, and electronics. Together, their output account for less than 6% of total Brazilian output. The May 2018 truckers’ strike was also a proof of the systemic importance of the transportation sector in Brazil’s economy.

 

 

 

Press contact

Lorenz Weimann
Allianz SE