Two important Emerging Markets (EMs) saw significant pre-election developments last week. In Brazil formal campaigning for the next general election commenced. In Indonesia, where formal campaigning begins in just over five weeks, President Joko Widodo announced that his running mate will be influential Muslim cleric Ma’ruf Amin. The economy is likely to be a — if not the — decisive factor in determining the outcome in both cases.
This comes at a time when investors are already increasingly concerned about EMs generally in the light of the US Federal Reserve’s current trajectory and the still swelling dispute between Turkey and the US (see my article of 16 August), Campaign-related turbulence in either — let alone an outcome unwelcome to investors — stands to exacerbate those concerns, increasing the risk of wholesale contagion, as highlighted in my article of 29 May.
Brazil: Doomed to disappoint?
On 7 October Brazilians go to the polls on to elect a new president: two-thirds of the 81 seats in the Senate; all 513 seats in the lower house, the Chamber of Deputies; and State and Federal District Governors across the country as a whole. If necessary (ie if no candidate gains more than 50% of the 7 October ballot), there will be a second presidential (and gubernatorial) round on 28 October — which is highly likely to be the way the election pans out. Full details of the electoral processes can be found here.
The big unknown at this stage is whether (following his conviction for corruption and money laundering) the bar on former President Luiz Inácio Lula da Silva (aka Lula), the declared candidate of the Partido dos Trabalhadores (PT), is revoked. Under a law, signed by Lula himself when he was president (2003-2010), candidates who have had a conviction upheld, as he has, are ineligible to hold public office for eight years. BUT he is not automatically barred from standing for office and is therefore free to campaign — albeit currently, and controversially, from jail:
- Unless or until the Supreme Electoral Commission officially rejects his candidacy; or
- The PT elects to withdraw him, presumably in favour of his running mate, Fernando Haddad, a decision which it would have to make no later than 17 September.
In the meantime the PT will continue to argue that Lula should be allowed to stand as he still has the right to appeal to the Supreme Court to try to have his conviction overturned. Given that he is leading in those opinion polls in which he features (with around 31% of the vote) and that there is no guarantee that Mr Haddad would enjoy a similar level of support, even with Lulu’s endorsement, the PT will likely pursue their cause for as long as they can. But expert opinion inclines firmly towards the party not succeeding, an eventuality which it appears to recognise in that Mr Haddad is campaigning very actively with senior member of the Partido Comunista do Brasil (PCdoB) Manuela Pinto Vieira d'Ávila, widely seen as the ‘vice vice’.
In polls where Lula does not feature, the leader is Jair Messias Bolsonaro of the Partido Social Liberal (PSL) on around 20%. Joe Leahy of the Financial Times (subscriber access only) describes Mr Bolsonaro — accurately, in my view — as having the “blunt political style” of US President Donald Trump and “the nationalist tendencies” of Turkey’s Recep Tayyip Erdoğan, accounting significantly for his public appeal in a country which is fed up with a weak economy and underfunded public services (especially state police forces and hospitals). And he has also attracted some positive attention from investors by stepping back from economic policy himself and leaving this to his running mate, Paulo Guedes, a Chicago-trained banker and investor with strong liberal leanings.
However, Mr Leahy is correct when he questions whether a Bolsonaro/Guedes presidency could push what would be a highly controversial economic programme (eg wholesale privatisations, slashing public spending and paying down national debt) through what will inevitably be a(nother) fractious and sclerotic congress. Frustrated on the economy, Mr Bolsonaro could rapidly go the way of Mr Erdoğan which would certainly not be to investors’ liking.
All this being said, investors may also be overestimating Mr Bolsonaro’s chances in the election. In common with the environmentalist candidate of Rede Sustentabilidade (REDE), Maria Osmarina Marina Silva Vaz de Lima, currently at around 12% in opinion polls — he has a strong following on social media; but, according to the Pew Research Center, only 53% of adult Brazilians use social media and only 61% even have access to the internet. However, close on 98% of homes have television, making this ‘traditional’ medium a significantly more powerful campaign vehicle. In a country where TV time during election campaigns is allocated strictly in accordance with the number of seats in the Legislature which a presidential candidate’s party holds, this stands significantly to disadvantage Mr Bolsonaro (and Ms Silva).
In principle at least this should work in favour of centrist Geraldo José Rodrigues de Alckmin Filho of the Partido da Social Democracia Brasileira (PSDB) who currently stands at just 10% but who is expected to get a lift from TV coverage now that campaigning is formally underway. Nevertheless, this may not be sufficient unless, as former President Fernando Henrique Cardoso and other elder statesmen are arguing, the currently divided centre can bring itself to unite behind him. The main barrier to this is the current president, Michel Temer, who is not running but whose unpopularity overshadows another centrist party, his Movimento Democrático Brasileiro (MDB) and its candidate, former economy minister and central bank head Henrique de Campos Meirelles (currently at just 2%). Mr Alckmin fears that association with the MDB would damage his chances. However, from where he stands today, this seems to me to be a chance not only worth taking but probably his absolute best hope even to break into a second round. The key point here is not the votes which Mr Meirelles would bring with him directly but the additional TV time which Mr Alckmin would be awarded thanks to the number of seats the MDB currently holds in the Legislature.
Note that, at the time of writing, there were eight other registered candidates and possibly more to follow. However, none is likely to pose a serious challenge in the first round. This being said, it is worth adding that opinion polls continue to register a large number of ‘undecided’ voters (consistent with the prevailing ‘plague on all their houses’ attitude towards Brazil’s politicians among the electorate); so, a surprise of some sort cannot be entirely ruled out.
The bottom line? If Lulu is allowed to run and serve again, he likely prevails irrespective of who else breaks into the second round. Otherwise, the run-off looks like Haddad vs Bolsonaro which, either way, is likely to leave investors ultimately, if not immediately, disappointed.
[Update — 24 August: Opinion polls are showing a smart uptick in support for Lula since the start of formal campaigning, putting him at 37-39%. The Supreme Electoral Commission is now expected to rule on whether he can run or not on or around 4 September. With free TV airtime based on the number of lower house seats each party holds kicking off on 31 August, if his bar is confirmed, he still has plenty of time to work on transferring sufficient of his support to Mr Haddad for the latter to have a good chance of making the second round. The main barrier to this currently appears to be Ms Silva who jumps into second place with 16% (from 8%) in polls where Lula is excluded, trailing Mr Bolsonaro who goes from 19% (and second place) in polls which include Lula to 22% when he is excluded.
The shift in opinion polls in the past few days has rattled markets, not out of concern over Lula per se but because it has woken investors up to the possibility of a Haddad vs Bolsonaro run-off, ie the scenario I pointed to in this article originally. At present, polls show Mr Bolsonaro beating Mr Haddad in a head-to-head but losing to all the other candidates with some prospect of making the second round. This latter point firmly suggests, to my mind, that Mr Haddad would ultimately prevail.
And what happens if Lula cannot run and fails to transfer sufficient support to Mr Haddad to ease him into the second round (which is not, of course, my base case)? Much as I believe Marina Silva to be significantly more pragmatic than her popular image, investors would certainly not be happy with the prospect of her runing-off against Mr Bolsonaro and the consequent likely Silva presidency.]
Indonesia: “The Brazil of southeast Asia”?
Not too long before the 2014 general election, I was involved in a TV interview with Sir Martin Sorrell — still at that time with WPP, of course — where we were discussing Indonesia’s economic performance. Sir Martin ended his opening comments by describing Indonesia as “the Brazil of southeast Asia”, a perspective with which I found myself in total agreement with the notable difference that he meant it as a compliment whereas I did not! My point of comparison was that both Brazil and Indonesia had enormous potential but suffered from such a deep degree of political sclerosis that the economic reforms needed to realise that potential simply were not happening and were not likely to happen in the foreseeable future.
To be fair, both countries have seen some improvement since then. In the case of Brazil I am genuinely impressed by the determination of the judiciary in their pursuit of Operação Lava Jato. And in Indonesia President Joko Widodo (aka Jokowi) has been a decent steward of the economy since he assumed office on 20 October 2014, even if the pace of structural reform has been somewhat disappointing and economic growth has failed to hit the 7% per annum target which he set himself despite broadly favourable international conditions.
It is still eight months until Indonesians get to pass their judgement on Jokowi at the ballot box — on 17 April 2019 — when, for the first time on the same date, they will also be used to elect a new Legislature, the 692-seat Majelis Permusyawaratan Rakyat Republik Indonesia. But, as previously noted, the election season is already effectively upon us.
At this stage, Jokowi appears to be in a strong position. He has been nominated not only by his own Partai Demokrasi Indonesia Perjuangan (PDI-P) but also by a handful of other parties including the influential Golkar. Furthermore, and bearing in mind their notorious unreliability, most opinion polls have him firmly as the frontrunner.
As was the case in 2014, Jokowi will be confronted by former general Prabowo Subianto of the Partai Gerakan Indonesia Raya (Gerinda). His running mate is one of Indonesia’s wealthiest businessmen and Jakarta’s former deputy governor, Sandiaga Uno. The two successfully spearheaded the opposition to Jokowi’s one-time protege, Basuki Tjahaja Purnama (aka Ahok) in the 2017 gubernatorial election — which is more than somewhat ironic as Jokowi’s running mate, Ma’ruf Amin, was a key witness in the subsequent blasphemy trial against Ahok, a Christian, which resulted in his imprisonment. Mr Amin’s adoption by Jokowi is clearly a move aimed at neutralising frequent accusations by his opponents that he is not ‘sufficiently Muslim’. This is particularly good news. Mr Amin is a notably conservative cleric with a well-honed ability to turn his beliefs into policy, which would not necessarily be good news for investor sentiment and therefore the economy. This at a time when, in any case, radicalisation appears to be growing in Indonesia.
The bottom line? This promises to be a particularly dirty election campaign which is likely to be marred by violence on the streets (as was Jakarta’s gubernatorial election) and possibly worse. Although Mr Prabowo will almost certainly narrow the current gap in support, Jokowi will likely ultimately prevail. But, as proved to be the case with his predecessor, Susilo Bambang Yudhoyono (aka SBY), investors should not expect a second (ie final) term boost to reform.
In the 29 May article I cited at the start of this one, I opined as follows:
“Important though it is, I do not believe that Turkey alone poses anything remotely resembling a systemic threat. But I also don’t believe that it should be viewed in isolation from other troubled emerging markets, especially not at a time when, collectively, EMs have to repay or refinance a total of around USD249bn in debt over the next year, according to Bloomberg. So, the question I have been posing is whether…we may see turmoil in sufficient individual EM economies to trigger a more general rout?”
In the light of recent developments in and around Turkey, I think it would be fair to say that I may have underestimated the contagion threat which it alone poses. However, I still believe that my “more general rout” is much more likely in the event of simultaneous political turmoil in at least one more major EM (and probably more than one). Like Turkey, Brazil was among the five potential problem countries I flagged; and I should certainly have included Indonesia too. In the coming weeks, investors would do well not to allow Turkey to distract them from these important economies at a time of rising political uncertainty in both and an increasingly challenging global context for EMs generally.