(Bloomberg) -- Brazilian assets jumped after President Jair Bolsonaro secured his way to a runoff election against Luiz Inacio Lula da Silva as investors cheered on the incumbent’s better-than-expected showing and bet his leftist challenger will be forced to moderate his stances in the second stretch of the race.
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Lula, as he is universally known, took 48% to Bolsonaro’s 43%, Brazil’s electoral court said, with almost all votes counted.
That tally left Lula without the simple majority needed for an outright victory, as some opinion polls had suggested, and set the two up for a bruising face off in what has already been a divisive election campaign.
Bolsonaro’s stronger-than-expected showing gave a boost to Brazilian assets, which had underperformed as polls signaled Lula could win outright on Sunday. The Brazilian real gained more than 3.5% while the benchmark Ibovespa index advanced 3.7%, with state-run oil producer Petrobras rallying more than 8%.
Analysts at Barclays PLC and JPMorgan Chase & Co. pointed at the tighter gap between Bolsonaro and Lula, which could suggest moderation in both political rhetoric and the economic agenda. Swap rates, which indicate investors sentiment toward monetary policy, fell on Monday morning trading with the contract due on January 2024 down 12 basis points. Most economists expect cuts on the benchmark Selic rate by June of next year, according to a weekly central bank survey published on Monday.
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The outcome still puts Lula, 76, within reach of a another stint at the helm of Latin America’s largest economy -- he was president from 2003-2010. Brazilians face surging consumer prices and the economy is only just coming out of a pandemic-induced economic slump during Bolsonaro’s tenure. Lula, in contrast, stirs memories of past prosperity.
Speaking to supporters late Sunday in Sao Paulo, Lula likened the outcome to a sporting match that had gone into extra time. “I always thought we would win these elections,” he said. “And I still think that.”
Brazil Election Live Results 2022
But it’s a closer margin than he would have wanted or polls had predicted, and gives Bolsonaro, 67, four weeks to try to make up ground. Both candidates are pledging to keep and expand on social aid to offset the pain of high prices.
Even if Lula does win he may have a weaker mandate to pursue his left-wing agenda than some experts have anticipated, and face a less amenable congress. In the senate, many candidates supporting Bolsonaro were on track to win or already elected. Bolsonaro’s allies also won the race for governor in at least nine states.
A sense of frustration pervaded Lula’s headquarters as the count wrapped up. Campaign advisers were particularly disappointed at his performance in the state of Sao Paulo, the country’s largest electorate. The appointment of former Sao Paulo Governor Geraldo Alckmin as running mate was expected to boost Lula’s prospects, they said, asking not to be identified discussing internal strategy.
“There is a strong Bolsonarist vote hidden, especially in the Sao Paulo countryside, but across the country in the smallest cities off the radar of polls,” said Deysi Cioccari, a political science professor at the Pontifical Catholic University of Sao Paulo. “This explains the pro-Bolsonaro result despite Lula winning in the first round.”
A nationalist in the model of Donald Trump, Bolsonaro frequently called the electoral process into question even before the ballot, casting doubt on an electronic voting system that officials insist is robust and fair. Electoral officials said voting on Sunday was largely peaceful.
Total turnout increased to about 122 million votes from 117 million in 2018. Bolsonaro received slightly more votes than in the first round in 2018 -- nearly 51 million versus 49 million, respectively.
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Bia Kicis, a lawmaker and an ally of Bolsonaro in congress, pushed back on the idea of rallying supporters behind claims of electoral fraud, saying the campaign will focus in the remaining weeks on trying to win back voters in the political center.
While the Lula camp faced disappointment at the outcome, just three years ago the former president was sitting in a prison cell for corruption and money laundering and banned from holding office. Released on a technicality, the way opened for him to run after the Supreme Court quashed his convictions last year.
If he does regain the presidency, he’ll be in charge of a different country.
Whereas he enjoyed record ratings as he rode a commodities boom during his first two terms, today’s Brazil is politically polarized and scarred by annual inflation running above 8.7% that’s squeezing regular Brazilians. Hunger is rising to levels not seen in well over a decade.
Lula has sought to turn that harsh reality to his advantage. To the poor, he pointed to good times when he ruled. “People need to be able to barbecue again,” he said. Lula previously battled throat cancer and has made clear he would govern for one term only.
Bolsonaro has promised to remain committed to a liberal agenda of privatizations and deregulation. Lula would strengthen public banks, boost the role of oil giant Petrobras in fuel production and launch a major infrastructure program. Neither has been specific about how they’d deliver on promises.
Still, Lula tapped a centrist former rival in Alckmin as his running mate. He also set out to unify a broad coalition of Bolsonaro opponents behind him.
That suggests a more mellow Lula if he wins a third term. In 2002, markets sold off when it became clear Lula would win, on fears he’d be a firebrand leftist. He quickly changed strategy after getting elected, signaling a willingness to embrace economic orthodoxy and fiscal austerity when needed.
Lula’s recent shift “substantially reduces any difference in the economics of his candidacy and Bolsonaro’s,” according to Adriana Dupita, Latin America economist with Bloomberg Economics. “The nod to the center spells some degree of commitment to fiscal responsibility.”
Victory for the Workers’ Party founder would still shift Latin America further to the left following the election of Gustavo Petro in Colombia and Gabriel Boric in Chile over the past year. The region, the world’s most unequal, has experienced post-pandemic upheaval with citizens using street protests and the ballot box to cast out leaders who failed to address poverty.
Unemployed cook Socorro Dos Santos, 48, voted Sunday in downtown Rio de Janeiro. She said times had become tough as prices rose, forcing her to choose between food or medicine for her husband, a diabetic. Bolsonaro dished out social aid “to buy people’s votes, but I voted for Lula twice and I’ll do it again,” she said. “I’m confident Lula will make things better again.”
Bolsonaro drew widespread scorn for his handling of the coronavirus pandemic, with the country recording more than 650,000 deaths, second only to the US. He became an international pariah for failing to clamp down on destruction of the Amazon rainforest. At home, he stoked fears of an authoritarian overreach via his clashes with the top court and other institutions.
In the end, what may cost him most with voters is a lack of faith in his ability to steer the $1.8 trillion economy. Economists now see the growth of around 2.7% this year, and unemployment is at a seven-year low. But worries persist on how long the pick up will last after a year marked by record electoral spending.
Still, Bolsonaro can rely on a sizable base, according to Rodolfo Costa Pinto, director of polling firm PoderData.
“A large slice of the population will stay with the president regardless of what his job approval is,” he said. “It points more to a question of identity than pragmatism.”
Known for his coarse style and embrace of Brazil’s past military dictatorship, the former army captain appealed to many on a God-fearing, business-friendly platform promising to be tough on graft and crime.
Speaking after the vote count on Sunday, Bolsonaro claimed he’d beaten the “lies” of polling companies but said he was focused on building “good” political alliances for the runoff vote.
“It’s about showing all there is to lose by backing the other side,” he said. “There’s nothing to gain with them.”
(Updates markets move in fourth paragraph. A previous version of this story corrected the name of a bank in fifth paragraph.)
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