Lula 3.0: What lies ahead for Brazil?

Luiz Inácio Lula da Silva secured an unprecedented third term as Brazil’s president on Sunday, clinching the election by the tightest margin in the country’s democratic history. But once Lula’s victory celebrations ended, the bleak political and economic outlook for his third presidential incarnation would have quickly crystalised minds within the upcoming administration to the scale of the task he faces.

The result exposes a country split down the middle and speaks volumes about the emergence of a Bolsonaro-driven (but not bound) conservative movement. This movement, combining conservatism and nationalism alongside US-style culture-war politics, has its base in the vast interior of the country, supported by fast-growing evangelical churches, the security forces (especially the military police), and a booming agricultural sector – accounting for nearly a third of the country’s GDP.

And although Bolsonaro preserves sufficient capital and branding power to continue attempting to call the shots, the conservative movement has already fomented other factions and leaders that will shape Lula’s time in office just as much as the outgoing president and his family.

New names have already emerged from this multi-layered process, with the ability to become leaders of an opposition that promises to give Lula challenge after challenge in the next four years.

In particular, the governorships of São Paulo, Minas Gerais and Rio de Janeiro (the three most populous states, comprising 40% of the country’s population) are in the hands of openly pro-Bolsonaro governors – yet all possess the ability to bid for the 2026 conservative presidential ticket themselves.

On the congressional side, deep political divisions and an uber-conservative Congress mean that Lula will not be granted a honeymoon period in 2023-Q1.

An uncertain road

Having the votes to avoid impeachment, but not the majority to implement any far-reaching reform is an uncomfortable position in the current Latin American setting – and precisely where Lula will kickstart his term.

With an adverse congress dominated by the opposition, amid a flourishing conservative movement, and with the formal rejection of nearly half of Brazilians – the situation shares an uncanny resemblance to the second term of Lula’s one-time protégé, Dilma Rousseff.

The first hurdle to clear before inauguration day (1 January 2023) is Bolsonaro’s management of the defeat. His passive-aggressive concession (responsible enough to avoid any accusations of breaking with institutional order, but short enough of a full acceptance) will shape the tone for the remainder of 2022.

Yet, as we have flagged before, institutional decisions might not match reactions on the ground. Indeed, nearly 400 pro-Bolsonaro demonstrations have blocked roads across Brazil, questioning Sunday’s electoral results, and even calling for a coup to prevent the transition of power.

The demos fall right within the parameters of our Civil Unrest Severity Model (which forecasts the expected level of damage caused by civil unrest activity in the next 12 months), in which Brazil sits at the 17^th riskiest performance (see below). The score is mainly shaped by a high inflation baseline, feelings of insecurity among the population, and the sheer scale of recent protests.

Against this backdrop, the rollout of Lula’s so-called 'social and fiscal responsibility' will be thoroughly scanned by a keen yet cautious business community. The very first challenge will be finding a concrete solution for the 2023 budget restrictions restraining key campaign promises – chief among them keeping social aid (Auxílio Brasil) at current levels.

Upcoming cabinet appointments will provide crucial signs on more structural, medium-term policies. And beyond key seats – namely, the economy ministry – we believe that the overall composition of the cabinet will provide the deepest clues about policy direction.

Lula will need to navigate a mixture of internal and external concessions skilfully. However, compromises to keep his Brasil da Esperança (BE) coalition together will also determine policy and shape the expectations of key stakeholders.

In a nutshell, Lula’s latest policy path will remain a salient question in the international investor community until we have complete clarity on his ministerial line-up.

In particular, his environmental policy overhaul could be on a scale rivalling the proposed US Green New Deal. Therefore, who will champion Lula’s environmental team will become as important as who sits on the economic chair in Brasilia.

Signs of this might start to emerge in the upcoming COP27 conference, as Brazilian law ensures that the president-elect can appoint a transition team to be brought up to speed with government affairs. However, if the president-elect’s team is forced to participate as 'civil society observers' or alongside government officers will provide further signals of how smoothly the transition is going.

Next term will be reality check

During his previous stints in office (2003-2010), Lula rode high on a commodities boom, a huge popular mandate and a congressional majority to match. But the reality of his third term could not be further away.

Lula will be quickly forced to negotiate across the political spectrum, likely resorting to pork-barrel politics. Major scandals, like the congressional-vote-buying (mensalão) will hang over his reputation and negotiating strategy. And in the context of an adverse international economic climate – with fears of a global recession and the drop in commodity prices looming large – a return to the ‘happy days’ of Lulismo is far from certain.

This means that political stability will remain at risk, with those who supported his return to office at the ballot box having much shorter patience than in previous terms. Recovering the 80% approval rating he had at the end of his second administration appears nothing short of a pipedream and businesses will have to brace for sustained turbulence in 2023.