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The world continues to turn on its fixed axis, and another populist political leader assumes the executive for a large, dynamic and somewhat unsettled country. At the end of October, Luis Inacio “Lula” da Silva was elected President of Brazil, defeating the incumbent Jair Bolsonaro. For Lula – the former metal worker, union organizer and leader of the Workers Party (Partido dos Trabalhadores PT), this is the second time around, having served as Brazil’s president from 2003 through 2010. Investors and creditors will gauge how pragmatic Lula will be, which will affect flows into (and out of) the country. Note that foreign exchange levels have been steadily declining since the onset of 2022, although total forex reserve holdings remain substantial. Overarching all, larger institutional issues should govern how risk-takers shape their sustained exposure in Brazil.

In some respects, parallels to the US can be uncanny. President Lula managed to edge past the incumbent Jair Bolsonaro, the leader of the Liberal Party (Partido Liberal PL) by capturing 50.9% of the vote against Bolsonaro’s 49.1% – the relatively close margin highlighting the political divisions in the country.

Like the US, Brazil’s divisions have a geographic cast. US Democrat Party strongholds are in the Northeast, Great Lakes and West Coast regions of the United States, and Republican support is found in the South and Center of the country. In Brazil, Lula’s support was substantially in the country’s Northeast, Bolsonaro found his in Brazil’s South, largely.

In many respects, Bolsonaro hewed to the nationalist populist way, although aligned with “centrao”, the collection of parties “without specific ideological loyalties”. This connoted an affinity for some horse trading and deal making, while furthering a generally more pro-market agenda. That sense for political expediency saw the Bolsonaro administration implement a BRL 600 monthly distribution per capita to poor families to shore up his political support prior to the election.

The effects from Covid and the public’s negative perception of the incumbent government’s efforts at addressing the pandemic weighed against Bolsonaro’s election prospects, though. Brazil’s circumstances, in the midst of the pandemic and global economic correction, primed conditions for Lula’s bid at another presidential term.

Of course, things are not so straightforward. Bolsonaro does enjoy solid political support, especially in the country’s south and increasingly with the country’s evangelicals, a growing segment of Brazil’s population. Bolsonaro has also received plaudits for his attempts at opening up the country, de-regulating further and making the economy more market responsive.

Lula’s earlier presidential tenure was not pristine as well, galvanizing those partisans who stood squarely against his renewed efforts toward the presidency.  Lula had been investigated and later convicted on charges of corruption prompted in the far-reaching “lava jato” or “car wash” investigations. He served nineteen months in prison.

It should be noted that the country’s supreme court later over-turned and vacated Lula’s conviction on the grounds that the earlier administering court did not have jurisdiction over the president, not necessarily because the charges were ill-founded or false.

And yet, Lula – the populist socialist – facilitated, or at least witnessed, reasonable economic stability and growth during his presidential tenure.

And, again more caveats – for the external investor or lender, the underlying institutional context should be considered and should inform risk-taking. We note that the Brazilian public’s own trust and perception of local political and civic institutions is jaded, if not threadbare.

Looking at the World Bank’s World Governance Indicators (WGI), Brazil scores for the most part below the average WGI levels for “non-defaulting” countries – i.e. countries which have never “tripped” into effect a political risk insurance claim, as counted from data made available from Zurich Insurance.

Brazil scores below “non-defaulting” benchmarks in WGI measuring public perceptions of corruption control, rule of law, and civic stability – all weighing on the atmosphere attending business exposure and contractual commitments. Effectively, this institutional profile should inform risk-taking and the due diligence process needed to participate in Brazil’s domestic economy and capital markets.

Also of importance, as the electoral season was unfolding in Brazil, foreign exchange reserves had been declining. Central bank foreign exchanges holdings have moderated from USD 360 bln in January of this year to USD 326 bln as of this past October. The decline hasn’t been precipitous or actually perilous, but it has been steady. As such, an acceleration or even just a continuance of this trend bears watching.

Charles de Gaulle is purported to have said, upon visiting Brazil in the nineteen sixties, that Brazil “is a country of the future”, while caustically adding, “and always will be”. Given these qualifying remarks, it must still be said that Brazil remains a dynamic and large economy and a society of over 210 million people. It is also a place rich in natural resources and it has fostered several globally competitive first-rank companies.

In many respects, over the ensuing decades, though, de Gaulle’s pronouncement was seemingly borne out. The country defaulted on its external debt during the eighties and felt rampaging inflation for many years, whether under the rule of a military administration or under a new democratic constitutional system.

And yet Brazil’s dynamism – a dynamism almost functionally inherent to any large society – has originated its own catalysts for change and growth. One such catalyst was in the person of Fernando Henrique Cardoso – an intellectual, social scientist and darling of the traditional Left, who was elected to the presidency in the mid-1990s. Like Nixon going to China, Cardoso deviated from the usual or the expected; he departed from the script of socialist bromides and saw the wisdom of implementing the revolutionary Real Plan or currency linking plan during his presidential term. That policy measure required difficult fiscal discipline, and firm adherence to its logic. The resulting exchange rate and price stability nevertheless resulted in a huge fall in annual inflation that has persisted. For a country that had been prone to hyper-inflation, this was miraculous.

Which takes us again to Lula. Upon assuming leadership of the country for the first time, Lula, the labor organizer and man of the streets, who followed “FHC”, as Cardoso was known, faced the choice – to deliver radically or hew to what seemed to be working. Lula proved to be pragmatic and chose the latter, capitalizing and sustaining the stability that the Cardoso administration had fostered. Ultimately, Lula had the economic momentum and resources to implement social transfers such as “Bolsa Familia” and “Fome Zero” which did much to improve conditions for the impoverished or modest levels in Brazilian society.

So, the question is – how effective, how pragmatic will this re-installed Lula government be? It will bear watching and there are no guarantees. But one thing to bear in mind: Unlike any other leader of a nation, certainly a large nation comparable to Brazil, Lula stands alone with a distinctive perspective, a unique empathy perhaps.

As a child, he migrated with his family from the rural Northeast to the very poor sections of Sao Paulo. Lula grew up to work with his hands and his back, having in fact one of his hands maimed, losing a finger in an industrial accident. He has known poverty, its bite, and the importance of finding what works, so things can improve in a real way, not in a theoretical one. Whether this pragmatism is manifest again remains to be seen. Key economic appointments to his government, to the leadership of BACEN, will be important signals.

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