Brazil’s presidential runoff: instability looms


Executive Summary

  • Polls significantly underrated support for President Bolsonaro and his allies running for Congress, the Senate, and Governorships, but Lula remains the favorite to win the presidency on October 30.

  • Profoundly polarized, Brazil faces the risk of political violence in the runoff’s aftermath and Bolsonaro’s contestation of the result if he loses, potentially compromising governability for years.

  • Whoever wins will face widespread discontent and anti-incumbency sentiment; Bolsonaro, if re-elected, will try to further control the judiciary and undermine checks and balances. In foreign policy, Lula would reconnect Brazil with the West; Bolsonaro would increasingly depend on China.

Implications for

International Businesses

  • Stagnating or declining economic activity over the past decade coupled with a weakened currency and the pandemic’s toll indicate a difficult macroeconomic environment, no matter who wins.

  • With recently increased social spending likely to become permanent, the next president inherits a challenging fiscal situation. Low approval ratings additionally limit the political scope for spending cuts and reforms.

  • If victorious, Bolsonaro would slowly continue reforms to reduce the cost of business,but Brazil's OECD accession and ratification of the EU-Mercosur trade deal remain unlikely. Lula would engage the country more on climate change but less so on further privatizations and trade liberalization.



State of Play A steady business environment despite political instability

Despite their fundamentally different political views for Brazil, neither Jair Bolsonaro nor Ignacio Lula da Silva would pursue and visions economic policies as president that negatively impact the country’s business environment. Bolsonaro would continue a slow but steady liberalization policy that is supported by local business elites. Yet, his increasingly poor reputation in the West and the expectation that a second term in office would lead to a deterioration of Brazilian democracy, environmental policies, and the rule of law, with clear drawbacks for investors. As long as Bolsonaro is president, EU leaders are unlikely to ratify the EU-Mercosur trade deal or green-light Brazil’s accession to the OECD. Moreover, a continuation of current environmental policies increases the risk of Western consumers boycotting Brazilian products. Lula, in turn, is expected to move further to the center, e.g., by appointing a mainstream Minister of the Economy and respecting the independence of the central bank. Putting the Mercosur trade deal to work, however, may prove difficult, as his Workers Party has signaled it wants better protection for Brazilian industry, but the EU is unwilling to reopen negotiations. Lula could also delay Brazil’s OECD accession given opposition among his nationalist, anti-neoliberal base. A long-awaited tax reform, facilitating the unwieldly tax code, is conceivable under both candidates.

Key Issues Democratic erosion as both a short- and medium-term risk

About a quarter of Bolsonaro voters are so radicalized that they do not want their candidate to concede or accept defeat. As Bolsonaro will most likely lose the runoff, the big question is whether his core followers – roughly 12 million people – are ready to turn the page or would attempt to prevent the transition of power. In this case, the Brazilian army will play a decisive role. While they have in the past equivocated rhetorically and at times defended Bolsonaro's bogus claims about bugs in the electoral system, an outright coup is improbable. More likely, even with moderate post-election violence and a non-cooperative stance by the outgoing administration, the transition of power will take place.


A more significant risk is that millions of Brazilians will not recognize the legitimacy of the next president. Signs indicate that at least part of the opposition will try to unseat a President Lula from the outset. In recent years, the executive office has continuously lost power to the legislature, so that, in the second half of his term, not Bolsonaro, but Arthur Lira, president of Congress, was the most powerful politician in Brazil thanks to his final say on all budgetary matters. In addition to thethreat of extreme polarization,Brazilian democracy also faces perennial political instability caused by a half-baked parliamentarism forcing the president to hand over extraordinary amounts of money to Congress to avert impeachment. In June, for example, congressmen willing to support Bolsonaro received over U$ 900 million in funds to be spent largely without oversight. Unless the next president regains the capacity to steer the government, political paralysis is set to prevail, inevitably undermining public confidence. This sets the stage for authoritarian-minded leaders to call for a concentration of power in the executive.

The election result will determine Brazil’s geopolitical positioning

Western government officials and business elites tend to welcome Lula’s possible return to the presidency, as the former president is widely seen as more predictable and pragmatic than Bolsonaro. If elected, he would work to quickly overcome Brazil’s current diplomatic isolation in the West. In particular, he would resume and intensify environmental cooperation with the West. (such as the Amazon Fund financed by Norway and Germany), which has largely ceased under the incumbent. However, on the growing tensions between Russia and the West, Brazil and Europe will inevitably disagree, as neither Lula nor Bolsonaro are willing to abandon the country’s neutrality. Bolsonaro visited Moscow days before the invasion, and Lula affirmed in a TIME Magazine interview that Zelensky was “as responsible for the war as Putin”.


Similarly, Brazil would take a neutral stance in a possible crisis with Taiwan. Brazil has long sought to maintain cordial diplomatic relations with all major powers, including China. The intensifying great power politics, the “tech war” between China and the US, and the possible emergence of a “digital iron curtain” between two technological spheres of influence make the implementation of such a strategy of “non-alignment” increasingly difficult. Irrespective of the election outcome, Brazil is set to remain committed to the BRICS group and to counteract any of its members’ diplomatic isolation. There is a cross-party consensus that Brazil stands to benefit from strong relations to China and Russia, which it can use to balance US influence in Latin America.


Although Bolsonaro initially ran as an anti-China candidate back in 2018, Trump’s departure from the White House weakened his “anti-globalist” and “anti-communist” foreign policy. Faced with near-complete isolation in both the West and China, Bolsonaro has ceased his attacks on Beijing. He silenced his party’s anti-China faction, and instead chose “globalist elites” and leftist leaders in Latin America and the West as his main targets. The Chinese government now sees the crisis in the bilateral relations as largely resolved and considers Bolsonaro an ally against the West. With him in office, Beijing has far fewer competitors in its quest to consolidate its strategic influence in Latin America’s largest nation.