Brazilians will head to the polls on Oct. 7 for an election that hasn't been this open since the country's return to democracy in 1989. Polling suggests that far-right candidate Jair Bolsonaro and leftist candidate Fernando Haddad will advance to a second round. Victory, however, is likely to bring the winner more challenges than relief, because a divided Congress could very well stall the next president's vision for the country.
In its 2018 Fourth-Quarter Forecast, Stratfor noted that the South American trading bloc Mercosur would make progress on a free trade agreement but that the result of the Brazilian election could delay such negotiations. Now, as Brazilians head to the polls to elect a new president and members of Congress, the country's political and economic direction hangs in the balance, as does the fate of wider trade talks.
The Scandal That Took Down the Heavyweights
Events over the past four years have made this year's elections the most hotly contested in a generation. During 2015-16, Brazil experienced its worst economic recession ever, as well as severe political turmoil due to a widespread corruption scandal that hit all of the country's major parties. In essence, most of the country's main political leaders were either jailed or investigated for participation in the Petroleo Brasileiro (Petrobras) corruption scheme. Former President Luiz Inacio Lula da Silva was the biggest casualty of the probe after a court sentenced him to 12 years in prison for fraud. The popular leader planned to run for president again, but Brazil's Superior Electoral Court recently invalidated his candidacy, citing his conviction.
On the economic front, Brazil's gross domestic product plunged almost 8 percent between 2015 and 2016, causing the country's unemployment rate to jump from 6 percent to 13 percent. The economic recession also created major security problems. Some of Brazil's states, such as Rio de Janeiro, were forced to delay salary payments to their police forces. In other states, police officers went on strike, leading to a spike in crime across in the country. And because many of Brazil's major engineering and construction companies were implicated in the corruption probe, progress ground to a halt on much-needed infrastructure projects. The situation, however, has changed since President Michel Temer assumed office in 2016, after the impeachment and removal of President Dilma Rousseff. Temer passed a number of economic reforms, which have smoothed the way for foreign investment in the country's oil industry. Brazil also emerged from its recession last year as interest rates dropped to their lowest level in several years; at the same time, the country's financial authorities managed to reduce inflation to just over 4 percent. Nevertheless, the benefits of the changes haven't trickled down far enough for much of the population to feel an improvement. The unemployment rate might be gradually dropping, but it's still about 12 percent.
Leaders of the Pack
Brazil's difficulties on the political, economic and security fronts have opened a path for nontraditional political parties and candidates to make a bid for the presidency, particularly Bolsonaro. The far-right candidate, who narrowly escaped death when he was stabbed at a rally on Sept. 6, leads the race, followed by the Workers' Party candidate, Haddad, according to recent polling. Bolsonaro's simple law-and-order agenda has resonated with segments of the population disillusioned by corruption scandals, unemployment and criminality. His relatively low political profile allows him to present himself as a political outsider, though he has been a legislator since 1990. Most crucially, Bolsonaro is not tainted by the Petrobras corruption scandal, unlike many other leading politicians.
In terms of economic policy, Bolsonaro favors the privatization of state-owned companies, but not Petrobras or state-owned lenders such as Caixa bank and Bank of Brazil. He has also proposed measures to open the country to greater commerce through free trade agreements — something Brasilia had already been pursuing through the Common Market of the South (Mercosur). Bolsonaro is hampered, however, by the small size of his Social Liberal Party (PSL), which controls just nine of 513 seats in the lower house, meaning that he would encounter difficulties in passing his economic agenda without support from many other parties.
Haddad, by contrast, hails from the establishment, possibly hurting his chances with voters incensed by the corruption scandal. Even so, the Workers' Party remains strong, especially in the poorer northeastern states, which benefited significantly from income redistribution during the party's 2003-2016 reign.
If Haddad wins, he is unlikely to implement price controls and increase the amount of state intervention in the economy, unlike the last Workers' Party member to lead Brazil, Rousseff. Haddad has already indicated that his economic policies will differ from those of Rousseff and that he supports more free trade agreements. Nevertheless, he could try to overturn Temer's labor reforms, which have sought to make labor outsourcing more flexible. And unlike Bolsonaro, Haddad would have a better chance of implementing his economic vision for the country, because he can call on more support in the lower house. The Workers' Party possesses 63 seats in the lower house, meaning it will have a better chance of forming a broader coalition than the PSL.
Looking for an Upset
But amid such fragmentation in Brazil's political scene, Bolsonaro and Haddad are not the only candidates with a shot at the country's most important post. The center-left Ciro Gomes, center-right Geraldo Alckmin and environmentalist Marina Silva all trail the front-runners, yet any of them could squeak into the second round of the elections. Alckmin favors continuing the current economic and trade liberalizations — and there is a broad array of parties that would be amenable to his measures. Gomes, however, would likely try to put the brakes on Temer's liberalization drive, because he has proposed the expropriation of any oil fields that were auctioned in the last two years. Silva, meanwhile, backs moves to liberalize the economy and trade, but her goal of instituting more rigid environmental rules could hinder extractive industries.
The ultimate success of Brazil's economic and trade reforms will not depend solely on who wins the election. Instead, the ability of the next president to implement his or her agenda will rely on a highly fragmented Congress that currently features more than 30 parties — a degree of division that is unlikely to change in the simultaneous congressional elections on Oct. 7. This political gridlock may paralyze the resumption of infrastructure projects and obstruct ongoing free trade negotiations. Nevertheless, Brazil's next president has no choice but to cobble together a coalition of supporters in Congress; if not, his or her term could simply fizzle out.