Spotlight on... Brazil

Background: Corruption charges continue to threaten Lula’s comeback

On Thursday (January 25), Brazil’s former president, Luiz Inácio Lula da Silva, accepted the Workers Party’s (PT) nomination for presidential candidate ahead of national elections scheduled for October. The defiant move followed a ruling on Wednesday in which judges dismissed his appeal against a corruption conviction, with markets rallying around the possibility of a 12-year prison sentence for the popular leftist leader.

In July 2017, Lula, as he is commonly known, was convicted for accepting a beachfront apartment and refurbishments worth $1.1 million dollars, according to the prosecutors, in exchange for helping a construction company with contracts at state-owned oil company Petrobras. His lawyers say they will appeal to higher courts, but it may prove difficult to have the decision overturned in Brazil’s slow judicial system, focused on showing its might in a massive anti-graft probe, before the Electoral Tribunal authorises the official candidates in August.

Currently, Lula can still run for office, but doing so may further weaken Brazil’s left. This comes on the heels of an impeachment in 2016, ousting Lula’s hand-picked successor Dilma Rousseff and handing the reigns to her centre-right Vice-President, Michel Temer. Allies on the left may be reluctant to pin their support on Lula’s Workers’ Party, given the possibility his candidacy or even an eventual presidency could be annulled by the courts. In a highly fragmented multiparty system where coalitions are key, the PT could lose its dominance on the left for the first time since 1989, with little time for a viable replacement to gain ground.

Nevertheless, Lula commanded 36 percent of voters’ support before the ruling, according to pollster Datafolha. Many credit Lula for reducing poverty by some 20 percent during his two terms in office. He is also one of some hundred politicians and businessmen targeted by the “Operation Car Wash” corruption probe, and many on the left see him as the least worst of the bunch, where he at least pursues social policies.

But the race is wide open, with no viable centre-left or centre-right candidate making waves so far. Behind Lula is hard-right populist and social-media savvy Jair Bolsonaro, who has the support of Evangelical Christian groups, a growing political force in Brazil. Amidst a substantial rise in violent crime, Bolsonaro’s tough law-and-order proposals increasingly appeal to many Brazilians. Such rhetoric has proved capable of picking voters away from the PT’s traditional stronghold in impoverished North-eastern states.

Impact on Investors

Investors celebrated the ruling against Lula, who told a rally on Tuesday, “I don’t need the market!” Brazilian stock indexes reached a three-year high, and the Ibovespa benchmark climbed 3.7 percent, ending the day at 83.680 points. If elected in October, Lula has vowed to undo current President Temer’s market-friendly reforms, such as deregulation of the labour market and caps on government spending.

Nonetheless, the ultimate impact of Latin America’s leftist firebrands on economic policy has often been tame, as rhetoric is overshadowed by the realities of governance. Lula himself is a case in point. During his first tenure as Brazil’s President from 2003 to 2011, Lula regularly courted the business community and shied away from many of his more radical promises. Brazil’s economy enjoyed continued growth, boosted by high commodity prices and growing Chinese demand. The divide between rhetoric and policy means observers must stay on their toes, but the economic policy of another Lula administration may not be as fiercely anti-market as feared.

In contrast, Lula’s rival Bolsonaro has been explicitly charming business groups and foreign investors. Despite previous suggestions to shoot a President who had advocated privatisation, Bolsonaro’s basic vision involves privatisation of state-owned enterprises, increased trade, a smaller state and lower taxes Not an economist himself, Bolsonaro has pledged to follow the advice of a team of experienced technocratic advisors. Nevertheless, the candidate has proved himself a highly unpredictable character. With Lula’s prospects dwindling, investors should keep a close eye on Bolsonaro’s campaign.

If Brazil’s economy continues its current upward trajectory, a marked difference from the deep recession during Rousseff’s last two years in office, the prospects of a centrist candidate, most likely from the Social Democratic Party (PSDB), are also set to improve. Candidates on the far left and right, such as Lula and Bolsonaro, have high disapproval ratings and could be knocked out of the race if faced by a centrist candidate looking to uphold the Brazilian consensus-building tradition. Indeed, a broad coalition will be necessary in order to finally push a crucial pension reform through Congress, and lift the country from a recent drop in its credit rating by S&P.

For now, the presidential race in Latin America’s largest economy remains the most unpredictable in the nation’s history. Whichever candidate prevails, investors should remain watchful, as Brazil fits a regional, and increasingly global, picture of strong leaders defying expectations.

About Antonia Eklund

Antonia is an MSc student of Global Politics at the London School of Economics, specialising in Latin American affairs. She previously worked for Reuters News Agency, covering Brazilian politics and the Colombian peace process, after graduating with a First Class degree and Mark of Excellence in Spanish and Portuguese from the University of Cambridge.

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