Markets rally after surprise Brazilian election result

Vishala Sripatma (0:00)

Brazil's election heads to a runoff, and the markets look like they've got a favorite.

SPEAKER_2 (0:05)

Brazil is the biggest and largest economy and democracy in South America, and South America is emerging as this place where you see the US and China battle for influence.

Vishala Sripatma (0:15)

It's World Business Report from the BBC World Service.

I'm Vishala Sripatma. On the way, investors bet on a Bolsonaro victory in Brazil. How are airlines coping with higher fuel costs? Does it mean more expensive holidays for passengers? And we ask whether Tom Cruise's latest film is a hit or a flop.

So Brazil's presidential election is heading for a second round after neither of the two front-runners won enough votes outright. Now right-wing Senator Flavio Bolsonaro finished just ahead of President Luiz Inácio Lula da Silva, setting up a run-off vote later this month. Lula admitted the result was unexpected and promised what he called a new campaign. Meanwhile, speaking to supporters, Flavio Bolsonaro said the results showed Brazilians were ready for change.

SPEAKER_3 (1:17)

It's the end of the PT era.

Walter Todd (1:20)

The end of the PT era is decreed.

Arunade Mukherjee (1:21)

The change in our country.

SPEAKER_6 (1:23)

It is the end of the Workers' Party era. The end of the Workers' Party has been declared. The era of the Workers' Party that is leaving a legacy of a record of women murdered, a record of Brazilians in debt.

Vishala Sripatma (1:40)

So that was Flávio Bolsonaro and the economy is likely to be a big part of that contest. Brazil is grappling with high interest rates, rising public debt and also continued concern among voters about the cost of living. Pedro Bastos is an economist and political scientist at the Institute of Economics at the University of Campinas. Hello, Pedro.

Pedro Bastos (2:05)

Thank you for having me, Bichalla.

Vishala Sripatma (2:06)

Welcome. So it's being described as a bit of a shock result. Nevertheless, it's a narrow victory so far for Bolsonaro. And does it actually reveal much about how Brazilians are feeling about the economy because of that?

Pedro Bastos (2:22)

Yes, I think so, Bichalla, because Brazilians feel the economy through their debts.

Unemployment is close to the lowest level of record and real wages are up almost 4% in a year. But half of the adults are behind on some payment. That's a record in Brazil. And an average household loan cost is about 60% a year.

And I think the government almost said it made it worse. The fiscal rule kept the Bolsa Familia benefit frozen from 2023 until 17 days before the election.

So jobs were up, but so were debts. Many voters feel poorer than the statistics say, I think.

Vishala Sripatma (3:02)

And so that's a huge task for anybody coming in as a new president. What can Bolsonaro do to achieve something concrete quickly?

Pedro Bastos (3:14)

I think the choice in this election is about two ways of who pays for the judgment.

I have criticized Lula's absurdity, but if he raises the minimum wage and create a minimum tax on the very rich. Flávio Bolsonaro, on the other hand, promised tax cuts, more spending and budget surplus all at once. A newspaper in Brazil in April reported that he seems planes basically pensions and social systems adjusted only for inflation and the health education floors frozen. He denied it, but the arithmetic did not change. I mean, Lula's absurdity is somehow contained by these political bases.

Flávio's absurdity will be much deeper and the poor will probably pay for it. There's also risk for democracy, you know, because his father is in prison for plotting a coup. And with the Senate, Flávio government could pass an amnesty, for instance. Right.

Vishala Sripatma (4:10)

Right. And just quickly on interest rates, you mentioned inflation there. Brazil has some of the highest interest rates in the world, 13.75%.

Is that going to be a big issue for voters?

Pedro Bastos (4:24)

I think so, Insha'Allah.

Brazil doesn't have actually a debt crisis because most of the debt is currently in reais, our local currency. It has a crisis of the cost of that. Before interest, the public deficit is only 0.6% of GDP. But interest costs is almost 9% of GDP.

The central bank rate, as you mentioned, is 13.75. But in real terms, that's the highest in almost 40 economies. And families pay a lot for revolving credit cards, 445%.

Vishala Sripatma (5:05)

Pedro, thank you very much. Sorry to interrupt. We do have a huge amount of time. So thank you very much for your insight. Pedro Bastos there, an economist and political scientist at the Institute of Economics at the University of Campinas. Joining us is our markets guest today, Walter Todd. Hi, Walter.