Walter Molano | Brazil: No longer the sick man of Latam

For decades, Brazilians have argued that the laws of economics do not apply to their country. They would always insist that Brazil, somehow, was different.

This was the justification they used to apply heterodox policies.

However, for the last four years, the Brazilian economy has undergone a brutal recession, resulting in one of the most orthodox realignments ever recorded. As a result, Brazil has become one of the healthiest economies in Latin America, with a very low inflation rate and on track towards a positive current account balance.

Thanks to a classical adjustment, Brazil transformed itself from the sick man of Latin America to the picture of good health. As a result, it confirmed to the world that its economy was no different from the rest of the planet.

That is not to say that everything in Brazil is perfect. The large fiscal deficit, mainly driven by public-sector pension obligations, continues to push the country's debt-to-GDP ratio higher. This has been the main reason why the international rating agencies have repeatedly downgraded the country's credit score.

Yet, the situation is not as dire as they make it seem. The increase in the country's debt load, which is expected to finish the year at 80 per cent of GDP, is mainly in local currency. The external debt component is in the low double digits. Given that the Brazilian government has an infinite capacity to refinance its local currency obligations, it is not such a pressing issue.

This does not mean that the government can ignore the problem. The next administra-tion will need to address the issue as soon as it takes office. Otherwise, it will eventually manifest itself into inflationary pressures.

The other challenge that the country faces is the upcoming presidential elections. The good news is that former President Luiz In·cio Lula da Silva is in jail and IT seems that he cannot run for office.

Still, the electoral field is full of (mostly) independent candidates, and there is no front-runner. Moreover, there is a mix bag of ideologies that are competing. The pole position on the left of the political spectrum is anchored by Joaquim Barboso, the former chief justice of the Supreme Court. He is polling at 10 per cent of the intended vote.

Although Barbosa was appointed by Lula to the Supreme Court in 2003, he became renowned for leading the investigations into the so-called mensalao corruption scandal. Several senior PT officials were implicated and jailed for providing kickbacks in return for congressional votes.

Born into a poor black family, he worked as a janitor before putting himself through law school and moving up the judiciary. A member of the PSB, the small socialist party, it would be natural for Barboso to align himself with the PT. However, there is a lot of bad blood in the party about the party members who were jailed during the mensalao investigations. One of the problems in Brazil is that there are many candidates without parties, and many parties without candidates.

Gomes another option

With Lula in jail, the PT, which has a formidable organisational apparatus, is in desperate need of a candidate. Another person on the left is Ciro Gomes. A former finance minister under Itamar Franco and governor for the state of Ceara, he is well known.

Gomes was a founding member of the PSDB, but ran for president twice on the Socialist People Party, the PPS, ticket. He is a lone wolf, and would probably be willing to run on the PT ticket. Many Brazilians consider him to be most radical candidate of the pack. While he has six per cent of the intended vote, this could improve if he moves into the PT camp.

The centre is anchored by Marina Silva Vaz de Lima. She served as minister of the environment during the Lula administration and gained a good reputation among environmentalists. She also had a strong following from the evangelical crowd. This allowed her to place third during the 2014 presidential elections, even though she came across as being very timid during the televised presidential debates.

Her economic policies are centre-right, and would probably support implementing the much-needed pension reforms. However, many people question whether she has the leadership skills needed to negotiate such a difficult process. She has 14 to 15 per cent of the intended vote.

Next along the political spectrum is Gerardo Alckmin, the former governor of S„o Paulo. He is the market's favourite. A member of the PSDB, he is the only politician who is running under the banner of a major political party. He is polling with six per cent of the intended vote, but many analysts believe his numbers will improve when we get closer to the elections and the party begins to open up its war chest to spend on television advertising.

The pole position on the far right is anchored by Jair Bolsonaro, the congressman from the State of Rio de JaÒeiro. A former military officer, he is often compared to Donald Trump for his outlandish misogynistic outbursts. Nevertheless, he is being advised by Paulo Guedes, a well-known Brazilian economist who graduated from University of Chicago and founded BR Investments, a highly successful hedge fund.

Some people believe that Guedes would be instrumental in pushing through the necessary pension reforms. Bolsonaro is the front-runner, polling at 16 per cent to 17 per cent. He is running on a law-and-order platform, which resonates well among the electorate. He has strong support from millennials, mainly due to his social media campaign and their disillusionment with the traditional political parties. However, he also has the highest rejection rate of any of the front line candidates.

While Brazilians may think that their economy is different from everyone else, it seems that the laws of economics are alive and well in the tropics, and will continue to be so.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com