As Jair Bolsonaro, an outspoken far-right former army captain, takes over the Brazilian presidency, there is little doubt that change is on the cards. His divisive campaign rhetoric and preference for bilateral over multilateral trade has earned him comparisons to Donald Trump, but only time will tell if his bark is worse than his bite, writes Eleanor Wragg.


In a vote which ended the 24-year duopoly between the leftist Workers’ Party and the centre-right Brazilian Social Democracy Party, the victory of Jair Bolsonaro in the October presidential elections in Brazil looks set to usher in a new era for Latin America’s largest economy.

Campaigning on a platform of ‘Brazil above all’ – more than a little reminiscent of US President Trump’s ‘America First’ slogan, Bolsonaro’s wrecking ball rhetoric rattled regional allies and global trading partners alike as he took a leaf out of Trump’s playbook to bash China, threaten to shake up regional trade pacts, and push for the relocation of the Brazilian embassy in Israel to Jerusalem.


Mixed messages

On the economy, Bolsonaro’s comments put him squarely in the same camp as the region’s past military leaders: he once said that former Brazilian President Fernando Henrique Cardoso should face a firing squad for privatising state companies, and he has come out in favour of state intervention and control over strategic sectors.

But the nomination of the level-headed Paulo Guedes to lead a newly formed ‘super-ministry’ of the economy, which brings together the current planning, finance and industry portfolios, has heartened onlookers.

“I hear banks and exporters getting more excited about doing business in Brazil – albeit cautiously,” says Corina Muller Monaghan, head of political and credit risk, Americas, at Validus Specialty. “Some of them recognise the new positive tone towards foreign trade and investment and appear relieved, but for the next year or so they are still going to be looking to mitigate those risks and weigh up what is going to happen.”

For many, Guedes, a softly-spoken graduate of the University of Chicago and former head of an asset management firm, provides a much-needed pro-market liberal foil to Bolsonaro’s authoritarian leanings. “Paulo Guedes has noted in the past that Brazil is too protectionist and that the country will need deepening trade liberalisation,” says Carlos Caicedo, associate director, Latin America, country risk at IHS Markit.

In a recent report, Euler Hermes described Guedes’ pro-business policy platform as the “least worst” choice for corporates – which, while not a ringing endorsement, demonstrates that there is at least some upside for business. So far, Bolsonaro, who was sworn in on January 1, has already seemingly softened his stance on privatisation, saying that he will put the vast majority of Brazil’s 418 state-owned companies on the block within the first year of taking office.

However, recent history in Brazil has already shown that a well-placed ‘Chicago boy’ isn’t always enough to convince markets: former President Dilma Rousseff’s appointment of Joachim Levy during her second mandate lasted just 11 months, and Bolsonaro’s cabinet is already starting to backtrack on selling off state companies.

“I think foreign companies are already beginning to realise that the panorama is more complicated than they might have hoped. Guedes is of course extremely liberal, but Bolsonaro and the military people around him are far more nationalist, especially when it comes to state companies like Petrobras and Eletrobras,” says Jill Hedges, senior analyst for Latin America at Oxford Analytica.

She adds that fissures are already starting to appear and that more are likely to follow: “Given the incoherencies between the two positions, I think we may well see some policy deadlock, not least because of a very factional congress which is not going to be readily co-operative, and I wouldn’t be surprised to see a lot of cabinet changes over the next year.” Given Bolsonaro’s lack of executive experience, it remains to be seen how effectively he can mediate between these different positions.


Shifting trade policy

Under leftist leaders, Brazil has long been at odds with the US, with US officials discomfited by the impact its tight relations with Cuba and China had on American soft power in the region. But all this seems likely to change under the new president, whose public overtures to fellow populist Trump appear to be paying off. In an unprecedented move, Trump sent national security advisor John Bolton to meet with Bolsonaro in November, with the two holding discussions on trade and security co-operation. The Brazilian president-elect hailed the talks as “very productive”, while Bolton, in a speech at Miami-Dade College, called Bolsonaro a “like-minded leader”.

Bolsonaro’s appointment of conservative nationalist Ernesto Araujo as his top diplomat is another indication of potential trade policy. In his blog, with the tagline ‘against globalism’, fervent Trump admirer Araujo rails against multilateralism and Chinese dominance in investment and trade with Brazil.

“It seems clear, especially after nominating Ernesto Araujo as foreign minister, that Bolsonaro still plans to maintain his ‘anti-globalisation’ stance,” says Hedges. In practice, however, he may meet with resistance closer to home. “He has major constituencies that are big exporters, notably agro, and there are limits to how much he will want to upset them. He has already had to roll back on various earlier statements,” she adds.

On the China front, despite much sabre-rattling during the campaign period, few are convinced that Brazil will risk upsetting what has been its biggest trading partner since 2009. “China is an important source of both imports and exports and it is also a major foreign investor in Brazil these days. It seems like it is an area where the future Bolsonaro administration will have to tone down vis-a-vis the campaign period,” says Thomaz Favaro, director for Brazil and the Southern Cone at consultancy firm Control Risks, adding that the China-related rhetoric seems to have been taken directly from Trump’s playbook, but will not necessarily make it through the reality check of the Brazilian context.

Those in China seem to agree, with Hu Xijin, editor in chief of China’s Global Times, recently tweeting: “No matter what Jair Bolsonaro said during his campaign, I think he will adopt a China-friendly policy. China is the top buyer of Brazilian soybean and ore. Trump-style capricious China policy will not be in line with the interests of his administration.”

Others, though, are taking a less sanguine approach to the incoming administration’s provocations. When Bolsonaro doubled down in early November on a campaign promise to move the Brazilian embassy in Israel from Tel Aviv to Jerusalem – following again in Trump’s footsteps – Egypt cancelled an official visit by current Brazilian foreign minister Aloysio Nunes Ferreira in protest.

“A foreign policy shift would risk jeopardising Brazil’s very lucrative trade with the Arab world. Brazil is a big exporter of protein to Arab countries and has a trade surplus of US$7bn with Arab countries,” says Favaro, adding that it is not a given that the new Brazilian administration will indeed follow through on that initiative. “Given all of these constraints we ultimately believe that Bolsonaro’s foreign policy is likely to be markedly less disruptive than his campaign pledges have suggested.”


Shaking up regional alliances

The ailing Mercosur alliance, of which Brazil is a member along with Argentina, Paraguay and Uruguay – Venezuela’s membership remains suspended – looks unlikely to escape the Bolsonaro administration’s gaze. Speaking to local newspaper O Globo, incoming agriculture minister Tereza Cristina called the regional bloc “disadvantageous” for Brazil, and said that the country should either overhaul it or leave.

For his part, Bolsonaro has suggested that Brazil would try to find a way that would allow the country to seek bilateral free trade agreements independently from other Mercosur member states.

“This is a big proposal that we have yet to see if and how it will be implemented, because while there is no doubt that Mercosur failed as a vehicle for global integration, the other side is that Brazil maintains a positive trade relationship intra-bloc,” says Favaro. “In contrast with Brazil’s global export basket of which roughly two-thirds are commodities, Mercosur remains an important market for Brazilian manufacturers. Any attempt to significantly shift the dynamics within the bloc could see a backlash from the manufacturing sector.”

Hedges from Oxford Analytica adds: “Bolsonaro will be under pressure from manufacturing to keep trade alive with Argentina in particular, which is Brazil’s biggest market for cars.”

Argentina is Brazil’s most important trade partner in the region by a wide margin, but relations look set to become somewhat more complicated. Starting with Guedes’ statement that “Argentina is not a priority, neither is Mercosur”, and capped by Bolsonaro’s refusal to accompany then-president Michel Temer to the G20 summit in Buenos Aires at the end of November, Brazil is already scuppering Argentina’s plans for more open trade with the rest of the world. Meanwhile, French President Emmanuel Macron has said he would not sign an EU-Mercosur trade pact – 20 years in the making – if Bolsonaro made good on his plans to withdraw his country from the Paris Accord. For some, though, any actions by Brazil will serve only to hasten the all-but inevitable demise of Mercosur.

“Frankly, the Mercosur/EU association agreement has been around for a long time without really prospering. In the region, Bolsonaro will clearly give very little priority to Mercosur; whether its days are actually numbered is another question but if Brazil withdraws or ignores it there isn’t much left,” says Hedges.


Cutting the ‘Brazil cost’

Behind the headline-grabbing populism, there is growing optimism among the business and investment community about what a Brazil under Bolsonaro could look like. “I’ve heard from some lenders and clients that they feel like the Brazil cost of doing business will potentially be reduced. I think that the perception is that with Guedes on board, this is going to reduce some of those costs and that it will be easier to do business in Brazil,” says Muller Monaghan at Validus.

Chief of staff Onyx Lorenzoni recently said that the new administration will prioritise the economy and give business “more autonomy”. However, there is still very little detail about how this will be achieved.

For Mark Regenhardt, senior-vice president of credit, political and security risk practice at JLT Specialty USA, the tone is one of cautious cheer amid the uncertainty. “A lot of my colleagues and customers for the moment seem to be positive about this new change in the government. That is not to say that there aren’t going to be winners and losers, and it is hard to predict at this moment in time who those are going to be. There is optimism, but at the same time there is fear of the unknown.”

According to Euler Hermes, doubts as to the feasibility of the Bolsonaro administration’s economic programme “could trigger a currency depreciation”, which, while good for exporters in the main, would hurt foreign input-dependent sectors such as electronics and machinery.

Likely as a consequence, Regenhardt notes that he is seeing increased demand for insurance cover in the consumer electronics and white goods sector – as well as non-payment coverage in the agricultural sector. “They have had their share of difficulties as of late with the currency and general climate of the country,” he says.

Whether the contrasting ideologies within Bolsonaro’s cabinet can settle into one cohesive government, and whether Bolsonaro’s bombast will be attenuated by practicalities, remains to be seen. But the new Brazilian president’s message of reducing the overall size of the state, curbing public spending, rebalancing public finances and reducing the regulatory burden onbusinesses has certainly caught the attention of a large part of the global business community, particularly when compared to the more statist approach that was being offered by his opponents. As such, despite little certainty about what Bolsonaro’s Brazil will look like, investors and businesses alike are hoping for the best, while preparing themselves for any eventuality.