The Unlikely Persistence of Lula and Pension Reform

Despite a corruption sentence, Brazil's leading presidential candidate says he's not done yet. And will this be the month long-anticipated pension reform passes Congress?

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Investors breathed a sigh of relief two weeks ago when an appeals court upheld a corruption conviction against Luiz Inácio Lula da Silva, technically barring the former president from public office. Lula, however, vowed to defy the ruling and press on with his campaign to win the presidential election in October. A leftwing populist who markets fear would imperil Brazil's recovery from a two-year recession, Lula continues to lead polls of potential candidates. With the election set for October, an institutional crisis is brewing.

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Meanwhile, current President Michel Temer said legislation to reform the country's bloated pension system would come to a vote this month. The proposed reforms, which the government said are essential to rein in the public deficit and keep the state's pension fund solvent, have drawn fierce public opposition. Trade unions called for a national “day of struggle” on February 19 to protest the legislation. Yet, online traffic patterns suggest opposition to the reforms has diminished in intensity. Our signal tracking Brazilian digital concern over the austerity program has fallen, despite the public statements from Temer and the unions. By contrast, the signal rose in November and late December last year, when the government's push to pass the legislation stalled due to lack of votes, motivated in part by public demonstrations.

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With the signal's current downward trend indicating dwindling public pressure, Temer's prospects for passing the legislation could be brightening. That, in turn, bodes well for markets: Predata's backtest engine shows that in 2017 there was an inverse relationship between the anti-austerity signal and the Bovespa.