6 August 2018 Brazil THE ELECTORAL CHESSBOARD, UNVEILED Elizabeth Johnson / Grace Fan With the end of the party conventions, the full list of candidates – and VP running mates – for the wide-open October presidential race has finally firmed up With the start of the 2018 legislative session, the Temer administration is making its final offensive to pass pension reform, but it still lacks the necessary votes Notwithstanding ardent voter hopes of change, the biggest winners of the The continued environment of low inflation and the gradual economic recovery convention talks were Brazil’s two dominant parties of yore: the PSDB and the PT indicate a 25bps rate cut this week, but without reform, inflation will rebound The growth outlook continues to improve following the recovery of industrial Former President Lula’s PT has inched closer to the runoff round after enacting output, but the government will still struggle to meet its 2018 primary deficit Phase 1 of its Plan B and isolating leftist rival Ciro Gomes as a result target The economic improvements have had little impact on the Temer Market-friendly Geraldo Alckmin (PSDB) has selected a female, conservative administration’s approval ratings, underscoring the electoral volatility ahead senator as his VP pick, in a tactical move to win back the south and rural voters After forming last-minute alliances, both former Environment Minister Marina Silva and Paraná Senator Álvaro Dias have managed to keep their bids alive Unable to branch out, far-right Jair Bolsonaro picked a right-wing general as his VP choice, limiting his ability to woo undecided voters but firing up his core base Industrial production recovered in June but unemployment remains a concern Estimated TV/radio ad time for key presidential candidates % of total Far-right Left to centre-left Centre-right Bolsonaro (PSL) - 9sec Marina (Rede) - 21 sec Álvaro Dias (PODE) - 40sec Ciro Gomes (PDT) - 40sec Meirelles (MDB) - 1min 55sec Lula/Haddad (PT) - 2min 8sec)* Alckmin (PSDB) - 5min 32sec 0 5 10 15 20 25 30 35 40 45 50 Source: Local press reports. Politics Top issues Comment Expected market impact Political parties The end of the party conventions has brought partial Neutral, but the high nominate 13 consolidation of the once 20-strong presidential number of candidates presidential candidates, field. This favours six core presidential hopefuls, but increases the risk of a the most since 1989 the lack of a consensus candidate is evident in the surprise electoral result dispersion of the presidential field (Chart 1). (see Table 1 on p. 4) Workers’ Party (PT) The move confirms the PT’s plan to run the former Neutral; although the picks Fernando Haddad São Paulo mayor as its alternate candidate should market does not like as former President the electoral court find Lula ineligible to run; the PT Haddad, he is less Lula’s VP running mate also convinced the PCdoB party to join its alliance. dogmatic than Dilma Leftist Ciro Gomes fails His hopes of reaching an agreement with the mid- Positive, because it to seal alliances save sized Brazilian Socialist Party (PSB) were dashed by significantly limits Ciro’s with one party, Avante the PT, which convinced the party to remain neutral. chances in the race Alckmin seeks to His choice, Rio Grande do Sul Senator Ana Amélia, is Positive, as both the attract female voters known for her conservative views and could help the female and southern with VP pick and to former São Paulo governor win regional votes from votes are crucial for his shore up southern vote Bolsonaro and Álvaro Dias. Following the party odds; but his pick also conventions, Alckmin should have more than twice pushes him to the right, the TV/radio ad time of the PT candidate (Chart 2). polarizing his message After futile bid to form After female attorney Janaína Paschoal declined his Neutral; while his odds centrist party alliances, invite, the far-right congressman went back to his are capped by his VP Bolsonaro taps a right- roots when he selected General Hamilton Mourão as pick and his 1% share wing general as his his VP choice – likely hindering his ability to reach of TV ad time, voter running mate undecided voters but firing up his core base as well. apathy helps him Marina Silva and Álvaro Former Environment Minister Marina reached an Neutral, as both are Dias pull off 11th hour alliance with the Green Party, while Paraná Senator market-friendly but face alliances Dias has allied with 3 small parties. While outgunned visible hurdles ahead of in TV time, both have still kept their hopes alive. the first round Lula requests delay in The imprisoned former President is hoping to avoid Neutral, but if Lula were his habeas corpus case any possibility the STF may rule him ineligible to run to be freed from prison at top court (STF) even before the top electoral court (TSE) does so. it would be negative Economics Top issues Comment Expected market impact Industrial output After plunging in May because of the 11-day Negative (Chart 3), as the rebounds in June after truckers’ strike, industrial output jumped results were slightly worse plummeting in May 13.1% mom in June, but fell 2.5% yoy in Q2. than expected Domestic auto sales Despite a 17.7% yoy rise in domestic sales Neutral, as overall July exports and output rise in July and 9.3% yoy increase in output, auto still rose, but the Argentina but exports plunge exports fell 21% yoy in July, hurt by the crisis will weigh on auto output Argentine crisis (Charts 4-5). in H2 Unemployment dips to Workers who have dropped out of the job Negative (Chart 6), as this will 12.4% in Jun, -0.3pp market increased 1.9% yoy to a record erode consumer spending and mom and -0.6pp yoy as 65.6mn, while the number of people working push up voter anger workers stop job search in the formal sector reached a new 6-yr low. Brazil 6 August 2018 2 Chart 1: Number of presidential Chart 2: Estimated TV/radio ad time candidates in recent Brazilian elections for key presidential candidates % of total 25 Far-right Left to centre-left Centre-right 20 Bolsonaro (PSL) - 9sec Marina (Rede) - 21 sec 15 Álvaro Dias (PODE) - 40sec 10 Ciro Gomes (PDT) - 40sec Meirelles (MDB) - 1min 55sec 5 Lula/Haddad (PT) - 2min… 0 Alckmin (PSDB) - 5min 32sec 1989 1994 1998 2002 2006 2010 2014 2018 0 25 50 Source: Poder360. Sources: Local press reports. Chart 3: Industrial output Chart 4: Jan-July car production and exports % change, mom % change, yoy Thousand units (LHS) / % change, yoy (RHS) Auto output (LHS) 15 Exports (LHS) % change in exports, yoy (RHS) 10 2400 80 5 1800 0 1200 40 -5 600 -10 0 0 -15 -600 -1200 -40 Source: IBGE. Source: ANFAVEA. Chart 5: Trade balance Jan-July) Chart 6: Unemployment rate USD bn % (3 ma) Exports (LHS) 14 Imports (LHS) Trade balance (RHS) 12 160 50 140 40 120 10 100 30 80 20 8 60 10 40 20 0 6 0 -10 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Source: Trade Ministry. Source: IBGE. Brazil 6 August 2018 3 Table 1: Presidential candidates nominated in the party conventions, their running mates and key political alliances forged Estimated Vice-presidential TV/radio ad Political Key candidates Allied parties nominee time (% of ideology total) DEM, PP, PR, PSD, Rio Grande do Sul Senator Geraldo Alckmin (PSDB) PRB, Solidariedade, 44 Centre-right Ana Amélia (PP) PTB, PPS PCdoB, PCO, Lula (PT)* Fernando Haddad (PT)* 20 Centre-left PROS Henrique Meirelles (MDB) PHS Germano Rigotto (MDB) 16 Centre-right Swings Tocantins Senator (and between Ciro Gomes (PDT) Avante former Agriculture Minister) 5 hard and Kátia Abreu (PDT) centre-left Paulo Rabello de Castro Centre to Álvaro Dias (PODE) PSC, PTC, PRP 5 (PSC) centre-right Former PV presidential Marina Silva (Rede) PV candidate Eduardo Jorge 2.4 Centre-left (PV) Guilherme Boulos (PSOL) PCB Sônia Guajajara (PSOL) 2 Far left General Hamilton Mourão Bolsonaro (PSL) PRTB 1.2 Far right (PRTB) Other candidates Vera Lúcia (PSTU) None Hertz Dias (PSTU) Far left Eymael (DC) None Pastor Helvio Costa (DC) Centrist João Goulart Filho (PPL) None Léo Alves (PPL) Roughly Left 1% apiece Formerly Suelene Balduino Cabo Daciolo (Patriota) None left, now Nascimento (Patriota) right Christian Lohbauer João Amôedo (NOVO) None Right (NOVO) *If Lula, as expected, is found ineligible to run for public office, former São Paulo Mayor Haddad would replace him as the PT presidential nominee and Manuela D'Ávila of the Brazilian Communist Party (PCdoB) would become Haddad's running mate. Sources: Local press reports. Brazil 6 August 2018 4 Authors Elizabeth Grace Fan Johnson Senior Director, Latin Managing Director, America Research Brazil Research Brazil 6 August 2018 5 .