Is Marina the New Modi?

(from my colleague Ilan Solot)

We think Marina Silva’s electoral campaign will keep much of the momentum shown in the latest polls, and with good reason. While not a done deal, her confirmation as the PSB’s candidate for presidency tomorrow is almost certain. Not only do we think she has a very high chance of winning the elections – say, greater than 50% chance – but we also believe that a Marina government to be very positive for Brazil, both for markets and for the country as a whole.

Could Marina be the New Modi?

Notwithstanding all the obvious caveats, we see a scenario in which Marina’s campaign starts to look like that of Narendra Modi, who swept the last elections in India. Firstly, she is the only major candidate capable of exciting voters who have been disenchanted by the political system (i.e. protest votes). Indeed, the latest polls suggest that 21% voting intention for the first round came largely from the decline in the undecided/blank vote categories from 27% to 17%. Secondly, this is because she is still seen as an outsider facing traditional political elites (for the sake of the analogy, maybe we can even think of Lula as akin to Sonia Gandhi, a powerful player in the background of the governing party).

Thirdly, Marina has a strong appeal to young voters and will heavily depend on new campaign technologies.While she is unlikely to go as far as Modi’s live holographic 3D campaign, she will have to be innovative. This is especially the case given that she will have less funding and less TV time than the other candidates. For every 25 minute block of TV campaign time, Dilma will have 11mins 24s; Aecio will have 4mins and 35s; while Marina will only have 2mins and 03s. However, note that in the 2010, she managed to get nearly 20 mln votes (19%) with just 1 minute of TV time for her campaign.

Above all, we think Marina could represent a positive culture shock to the top echelons of Brazilian politics.She is seen as honest and with a credible anti-corruption campaign. Moreover, she seems to be best positioned to deliver a government that will keep the focus on social issues and the underprivileged classes, without appealing to populism and short-term economic policies.

But unlike Modi, Marina will have a hard time forming a majority in congress. Or will she?

Marina’s Governability and the Future of the PSDB

Governability won’t be a given in a possible PSB government, but is definitely manageable, in our view.Marina’s views are flexible enough that she would be able to transit through the right-left wings of the political spectrum better than the alternatives (Dilma from the PT, or Aecio from the PSDB). And most importantly, she will not be nearly as polarizing in the eyes of the public.

Moreover, we assign a high probability that the PSDB will offer its support for Marina if she wins. Marina had many differences with the PSDB in the past (for example, her recent criticism of an alliance between the PSB and the PSDB to support Alckmin in Sao Paulo). And there will undoubtedly be a lot of friction between her and Aecio in the next couple of months. Both will fight each other vociferously in the contest for the second round of the election against Dilma. But we think all these differences will be put behind them in the name of mutual interest and political pragmatism. Of course, other coalitions are possible, especially in the tropical political climate of Brazil, but we think an alliance between the two parties represents a large low hanging fruit.

To start, her political platform is similar to that of the PSDB in many ways. This is most obvious in the economic sphere. For example, her recent emphasis on the “economic tripod” (fiscal responsibility, floating exchange rate and inflation targeting) is very much in line with the views publically defended by the PSDB. The same goes for recent comments suggesting that her government would aim to reduce the bloated state apparatus. Many of her advisors, notably Eduardo Giannetti, are very well respected by mainstream economists. Also, the campaign coordinator for the PSB, Mauricio Rands, has already stated that the party will maintain the commitments made under Campos, such as tax reform early in the mandate.

But more importantly, the PSDB is likely to form an alliance with Marina because it would give the party a much needed facelift. Consider the options for the PSDB if Marina wins: remain in the opposition for at least another 4 years (after 12 years already), or join a potentially dynamic government elected with a mandate for political and economic change. The latter would give the party an opportunity to improve its image, to modernize itself, especially to young voters who will form the bulk of the electorate of future elections. It seems like an easy choice to us.

Currency: Volatility Is Inversely Proportional To Electoral Uncertainly

As we have maintained for months now, we expect USD/BRL to stay within the rough 2.20-2.40 range. All the signals from the central banks suggest that they their tolerance for volatility is at a low. This is undoubtedly because of still elevated inflation and the political landscape. The last thing the government needs now is to be criticized for losing control of the currency. And the last thing the central bank officials want is to be accused of influencing the elections.

The future of the real after the elections will greatly depend on who wins. We think that a victory by Aecio or Marina would give the currency a positive bias. It would probably come with greater capital inflows and an automatic boost to the central bank’s credibility. Alternatively, we see the real trading with a negative bias in the event of a victory by Dilma, given the reversal of the recent inflows into the Bovespa and the renewal of the government’s “progressive” agenda, which includes a competitive currency (in nominal terms, that is).