Bankers Bet Big on Brazil Candidate That Doesn't Exist Yet

(Bloomberg) -- Ask Sao Paulo’s banking elite who’s going to win Brazil’s next presidential election and they’ll say, hands down, it’ll be someone bent on fiscal reforms and privatization.

The only problem? Such a candidate has yet to emerge.

While it’s no surprise that financial insiders have a lofty wish list for Brazil’s next head of state, what stands out this time around is how confident senior bankers seem to be that a business-friendly candidate will not only step forward in coming months -- but will actually win next October.

If they’re wrong, Brazil’s stock market could be in for a tumble. All of the senior bankers, in lengthy chats over a week late last month, said securities prices now near record levels reflect the outlook that the country will extend a rebound next year, bolstering the case for a center-right candidate to carry on reforms that are lifting investor confidence. They asked not to be identified in a nation where top executives often shy away from speaking publicly about money and politics.

Whether their optimism proves prescient or naive, one thing is for sure: 2018 is shaping up to be an inflection point in Brazil’s three-decade-old democracy. Candidates have come forward from all corners of the political spectrum to vie in next year’s election, emboldened by two years of recession and scandal that led to former President Dilma Rousseff’s impeachment and almost toppled her successor.

While the options on the ballot may be many, bankers say they see only two real choices: Will voters stick with the leftist policies of recent decades that fueled a boom before collapsing in a massive corruption scandal and the worst recession on record? Or will they veer right -- not all the way, but enough -- to stay the course on pension reform, privatizations and regulatory overhauls amid a nascent recovery?

Investors driving up local stock and government bonds seem to think they already have the answer. Their enthusiasm has helped the benchmark Ibovespa index rally 21 percent this year, while prompting companies to issue 3.5 times as many new shares as last year. Mergers & acquisitions have jumped 32 percent from the same period a year earlier, data compiled by Bloomberg show.

So far, the candidates in the running don’t warrant such optimism, says Joao Augusto de Castro Neves, Eurasia Group’s director for Latin America.

‘Wishful Thinking’

“The view that there’s a very high chance a center-right candidate is going to win is a bit exaggerated,” he said. “You can argue the left will be less competitive, but there’s some degree of wishful thinking that a market-friendly candidate will win.”

Rather than the mythical candidate bankers are waiting for, Castro Neves says there’s a chance populism -- from the left or the right, or both -- will influence the outcome of the election. Recent polls bear that out.

Rousseff’s predecessor, Luiz Inacio Lula da Silva, who remains a voter favorite despite his recent conviction for corruption, led in the latest survey carried out by Ibope on Oct. 30, garnering 38 percent of likely votes. Jair Bolsonaro, a firebrand former army captain who’s been called “the Donald Trump of Brazil,” came in second with about 13 percent. Ten other potential candidates -- from Sao Paulo’s businessman Mayor Joao Doria to Luciano Huck, a popular television host -- all earned 8 percent or less.

In financial circles, the money is on Lula not running at all because of his legal challenges. And even if he does compete, bankers say, he’s unlikely to build on his base of hard-core supporters as polls show a high rate of rejection. Bolsonaro, meanwhile, has no real ability to build a coalition among parties and little financing, which will erode his chances as the race picks up, they predict.

For his part, Doria said he doesn’t rule out either Lula or Bolsonaro. “There’s excess optimism,” he said in an interview last week in his Sao Paulo office. “Brazil can’t handle another populist government, it’ll be the new Venezuela of Latin America.”

A lot is at stake. After eight straight quarters of recession that shaved more than 7 percent off of GDP, Brazil’s economy started to grow again in the January-to-March period. The outlook is for unemployment to continue to fall, too, after topping out at about 13.7 percent in March. Meanwhile, the benchmark interest rate is almost half what it was a year ago.

What Brazil needs now, the bankers say, is a candidate who can appreciate how fragile the recovery is and see it through by carrying out the reforms started by current President Michel Temer, who took over when Rousseff was ousted last year.

“We will have more names in the race in coming months,” Eurasia’s Castro Neves said. “The landscape is going to change. Polls today, they only tell slightly about the demands of voters, that they’re dissatisfied with political class, but not a lot about the candidates. That will only be defined by April.”

--With assistance from Raymond Colitt Vanessa Dezem and Julia Leite

To contact the reporters on this story: Felipe Marques in Sao Paulo at fmarques10@bloomberg.net, Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net, David Biller in Rio de Janeiro at dbiller1@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net, Vivianne Rodrigues at vrodrigues3@bloomberg.net, Jessica Brice

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