Currency forecasters' calm demeanor towards Brazil's 2018 elections is fading as it becomes clear that the burden of tightening the government's budget will fall on President Michel Temer's successor. The Brazilian real is likely to weaken faster and by a larger amount than suggested earlier this year and even just a month ago, according to the latest Reuters poll of currency strategists and economists, taken December 4-6.
The currency is seen weakening 2 percent to 3.30 reais to the dollar in six months, according to the median of 42 estimates. It would then slip further to 3.32 reais by the end of November, a month after the widely awaited vote, capping a 2.6 percent depreciation from Tuesday's close.
A widely expected interest rate cut on Wednesday was priced into the forecasts, economists said. The November poll had suggested the currency would trade flat in six months and weaken 1.4 percent in 12 months.
"Political risk, which is set to increase in the beginning of 2018, is clearly higher than the market had anticipated," said Gradual Investimentos chief economist Andra Perfeito. His remarks underscore how currency observers, who for months seemed certain that whoever wins the 2018 vote would push ahead with Temer's platform of austerity, deregulation and privatization, are now reviewing such assurances.
Former President Luiz I. Lula da Silva, who has rallied against Temer's reform efforts, is leading public opinion polls, though he could be barred from running if a higher court upholds his conviction for corruption charges. Law-and-order congressman Jair Bolsonaro, who ranks second in opinion polls, has made erractic remarks on economic policy, though he has made recent overtures to the business community.
Otherwise, the field is fragmented between a wide swath of potential candidates from environmentalist Marina Silva to businessman-turned-mayor Jo?o Doria as well as nationalist Ciro Gomes. The wide-open dispute has taken center-stage due to growing doubts over Temer's ability to pass a bill streamlining the social security system, which most investors see as critical to curbing growth of public debt and meeting budget targets.
"The market is increasingly aware that pension reform is a no-go, which means the elections become the big question mark," JGP Gestao chief economist Fernando Rocha said. "As the vote approaches, the market is bound to realize that the uncertainty is higher than what's been priced in so far." All of the 15 forecasters who replied to an additional question said their forecasts for the Brazilian real were skewed to an even weaker exchange rate.
While forecasters had generally been calm towards Brazil's elections, wariness over the Mexican 2018 elections has been brewing for months. The uncertainty has intensified in recent weeks due to growing expectations that talks between the United States, Mexico and Canada on trade will drag on at least through the end of the first quarter, close to the July vote.
In fact, the peso is seen strengthening 0.4 percent in 12 months to 18.7 to the dollar, according to the median of 21 estimates, less than the 4.3 percent appreciation forecast in the previous poll but still better than most of its Latin American peers. It would be surpassed only by the Chile's peso, which is set to firm 3.8 percent in a year thanks to a positive outlook for prices of copper, the nation's largest export, the survey showed.
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