The most dire warnings from analysts worry that Brazil may turn into the next Turkey if the left-wing Workers' Party (PT) takes power again... and the Real is tumbling back to cycle lows following the latest poll showing PT dominating with over 37% of the vote.
Even more crucially, market-friendly Geraldo Alckmin failed to show any gain with 4.9% of the votes, which wouldn’t be enough to take him to runoff
As Bloomberg details, all this pessimism reflects what’s really an intense distaste for the Workers’ Party, known locally as the PT, among investors and business executives.
They see the government of former President Dilma Rousseff as largely responsible for bringing about the worst recession in a century before she was impeached, and her predecessor Luiz Inacio Lula da Silva as a crook. While the PT has put Lula forth as its candidate, it’s unlikely he will be allowed to run in October because of a corruption conviction. His probable replacement, former Sao Paulo Mayor Fernando Haddad, gets no more love from traders.
“Turkey and Argentina are examples of how disrupting it is for financial markets when investors lose confidence in policy direction and institutions,” said Tania Escobedo, a Latin America strategist at RBC Capital Markets in New York. “Lula’s PT party would represent this scenario, unless it moderates its views significantly.”
One specific concern is that a PT government might seek to unwind the efforts President Michel Temer made to shore up the budget after the country’s credit rating was cut to junk, including a push to overhaul the social security system.
The result is selling in the Real... (and weakness in Brazilian stocks)
And judging by what the analsysts are saying - things could get far worse...
Brown Brothers Harriman & Co. says the real could tumble more than 20 percent to 5 per dollar.
Bank of America Merrill Lynch sees an even bigger drop to 5.5 under its worst-case scenario for the next government.
The Ibovespa stock index may lose more than a third of its value, according to the local hedge fund Rio Bravo Investimentos.
An unfavorable outcome in the presidential election as well as negative sentiment toward emerging markets globally could send the real to 5 per dollar, according to Win Thin, a strategist at Brown Brothers Harriman in New York.
“Whoever Lula backs would be the worst scenario,” Thin said. “We can assume that a lot of Lula’s support will flow to whomever he chooses to be his proxy.”