Impact of Brazil’s Local Elections on Businesses

Executive Summary

• Nation-wide elections for mayors and city councilors will likely impact Brazil's national politics, its federal government, and the upcoming elections for the Speaker of the House and President of the Senate - all of them relevant for investors.
• The local elections will be seen as a referendum on President Luiz Inácio Lula da Silva's policies, as well as a test of the opposition's strength, including former President Jair Bolsonaro's current political standing.
• The outcome of these elections might impact the Lula administration's policy trajectory, the strength of the pro-business majority in Brazil's National Congress, and the functioning of federal regulatory agencies in 11 key economic sectors.

Analysis

On October 6, Brazil will hold its nation-wide elections for mayors and city councilors. All 5,569 Brazilian cities will elect the head of the local executive branch, as well as all city council members for a four-year term.

While this electoral cycle focuses on local issues, and mayors and city councilors have a limited policy impact on businesses, the local elections will likely have a significant impact on national politics, the federal government, and the upcoming elections for the Speaker of the House of Deputies and the President of the Federal Senate - all of them relevant to investors.

Impact on federal government

Election watchers will be looking at the performance of the main political groups based on three indicators: the total number of mayors and city councilors they elect; wins in the 27 state capitals; and wins in the so-called "G103", the 103 cities with a population of more than 200,000.

If the election results in a larger number of mayors and city councilors formally supported by President Luiz Inácio Lula da Silva, this will likely be seen as voters' endorsement of his policies. While voters might not focus on specific policies - including, among other aspects, a lax fiscal policy, increased taxation, and state capitalism-type measures - individual perceptions on cost of living and economic prosperity tend to play a role in voting decisions. In this scenario, the Lula administration will likely continue its current policy trajectory. However, if the total number of mayors and city councilors supported by the president is equal to or lower than the existing number, the result will probably be seen as a rebuke of the Lula administration and might result in pressure to change current policies.

Similarly, the election of a larger number of mayors and city councilors formally supported by former President Jair Bolsonaro would signal a more unified and competitive opposition to the Lula administration. On the other hand, a lesser number would point to weakening of support for President Bolsonaro in favor of competing political forces on the left, the center, or the right. This latter possibility is particularly likely in Brazil's largest city, São Paulo, where a right-leaning, non-Bolsonaro-aligned candidate shows increased strength in polls, creating the possibility of a fractured opposition to President Lula.

President Lula will likely take these two outcomes into account in a potential cabinet reshuffle after the elections' second round, on October 27, or the congressional leadership election early next year. A reshuffle is likely, but its breadth and policy direction will probably be a function of local elections results and congressional leadership's election-related negotiations.

Local elections might also affect the federal regulatory agencies. Several of them currently operate with boards with acting directors, as the Lula administration has been holding nominations as part of a long-term dispute with the congressional leadership. If key President Lula-supported candidates are defeated in the elections, it is possible that the administration will make an effort to appoint them to federal regulatory agencies' board positions. This will further exacerbate the dispute with congressional leadership over this issue and negatively impact these agencies' ability to properly function.

Impact on congressional leadership

A final key measure of this electoral cycle will be the relative strength of political parties based on the number of mayor and city councilors they elect. Of particular interest will be the distribution among three main blocs. The first is the left-leaning, Lula administration-allied parties. The second is the center and center-right parties that are formally part of President Lula's congressional coalition, but are not ideologically aligned with the administration. This bloc only votes with the administration in exchange for cabinet and senior government positions, control over parts of the budget, and other political bargains. The third is the right-leaning opposition parties, linked to former President Jair Bolsonaro.

The results will influence current negotiations in Brazil's National Congress to elect a new Speaker of the House and President of the Senate in early 2025. The constitution bars the current heads of each chamber from seeking reelection in the middle of a legislature.

It is likely that both the new Speaker of the House and President of the Senate continue to be members of the center and center-right parties that are formally part of President Lula's congressional coalition, but have a larger degree of political autonomy, as well as a conservative and pro-business outlook.

This would continue to offer an opportunity for businesses and investors to push for pro-business reforms in Congress, even against opposition by the Lula administration, particularly in the House. Despite the fact that local elections will not immediately change the party composition of the congressional chambers, they will point to a weakening or strengthening of each party and, in consequence, to their political standing in negotiations for the new congressional leadership.

Takeaways for businesses and investors

Despite local political dynamics, the election for mayors and city councilors will be perceived by key stakeholders as a referendum on the Lula administration's policies. The outcome of these elections will likely influence the policy path of the administration in the next two years.

In addition to this, the elections will also impact congressional dynamics, including the upcoming election to Speaker of the House and President of the Senate. In this case, the outcome will probably influence the strength of the pro-business majority in Congress and its control over both chambers.

Finally, the elections might impact the current dispute between the Lula administration and the congressional leadership over control of federal regulatory agencies. The outcome might help resolve or further delay the nominations to board positions, directly impacting these agencies' capacity to create, reform, and enforce regulation in at least 11 key economic sectors: (i) civil aviation; (ii) food, drugs, and medical devices; (iii) healthcare; (iv) mining; (v) motion pictures; (vi) oil, gas, and biofuels; (vii) power generation, transmission, and distribution; (viii) roads and railroads transportation; (ix) telecommunications; (x) water and waste management; and (xi) waterways transportation, including international shipping.

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