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Analysis: Market awaits Lula’s nod to the center

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Vincent

The positive market reaction on Monday to the first round of presidential elections, with a sharp drop in the foreign exchange rate and the stock index benchmark Ibovespa on the rise, reflects both an increase in the electoral chances of President Jair Bolsonaro and the expectation that former President Luiz Inácio Lula da Silva will be forced to make a nod to the center, with a more concrete agenda of fiscal and monetary responsibility and less intervention in the economy.Asset managers told valor they do not expect Mr. Lula da Silva to make a more radical move, like picking Henrique Meirelles as his finance minister. But many expect him to fill some gaps in his government plan.The fact that Brazilians have elected a more conservative Congress is seen as a barrier to more interventionist measures and to undoing reforms put in place in recent years.One point defended by Mr. Lula da Silva’s campaign, for example, is a more prominent use of state-owned banks to grant credit. An eventual Workers’ Party (PT) administration could marginally increase the role of the banks, but a full-blown developmentalist credit policy would be more difficult to pass without changes in legislation.During the Temer administration, the economic team headed by Mr. Meirelles himself preferred to support the restriction of the activities of the Brazilian Development Bank (BNDES), for example, by means of laws, such as the one that created the Long-Term Interest Rate (TLP), which limits the concession of subsidies embedded in the bank’s credit.Another example is the Law of State-owned Companies and the reform in the governance of Caixa Econômica Federal. None of this prevents the political use of state-run companies, as became clear in the Bolsonaro administration with the interference in Petrobras. But the cost of change is much higher.The positive reaction of the markets also reflects a repricing of Mr. Bolsonaro’s chances in the election, but this does not mean there is euphoria in the market. This is explained by the fact that, despite Mr. Bolsonaro’s better-than-expected result, Mr. Lula da Silva finished in first place in the first round anyway, less than two percentage points away from definitively winning the election.There is also...

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