Lula’s path to re-election just got a little more complicated…

Lula’s path to re-election just got a little more complicated…

Brazil’s former president Lula da Silva has been leading the polls for the upcoming October presidential elections. However, a recent court ruling is likely to complicate his chances of running for presidency due to the Clean Slate Law. Meanwhile, the market has reacted extremely well to a potential race without Lula.

The ruling and possible appeals

On 24 January, the Regional Federal Tribunal (TRF4) unanimously upheld the lower court decision to convict former president Lula for corruption and money laundering. The three judges also decided to expand the sentence to just over twelve years in prison. Given that the decision was 3-0, Lula may only appeal within the TRF4 to ask for clarifications on omissions or ambiguities of the sentencing, not to reverse the conviction – and this appeal within the TRF4 is expected to occur rather quickly.

After the TRF4, Lula can also appeal to the Superior Court of Justice (STJ) matters related to legislation and procedural errors and after to the Supreme Federal Court (STF) in matters related to the Constitution – not the decision of the case itself.

His conviction on the TRF4 technically means he could be sent to prison, however, the court has expressed that this will only happen after Lula has exhausted his appeals within the TRF4. If he is sent to prison it is expected to occur in June-July. At the same time, Lula is also being accused in seven other cases.  While the appeals process is ongoing on the higher courts Lula still has to right to register as a presidential candidate.

Candidacy at risk

Lula has been leading the polls of the Brazilian presidential election since announcing his pre-candidacy last year, however, his official registration as a candidate through the Workers Party (PT – left) occurs between 20 July and 15 August 2018. It is only after this registration that the Superior Electoral Court (TSE) will make a decision regarding his eligibility to run under the Clean Slate Law which states that someone criminally convicted in an appeals court cannot run for office.  The TSE has until 17 September to decide but most likely the court will rule Lula as ineligible to run. Only the TSE can determine if he will be allowed to run or not.

If the TSE rules that Lula is ineligible he can request a provisional decision by the STJ or the STF to grant a suspension making him free to run – that is only if his appeals process in the corruption and money laundering case is still ongoing.

If his appeals finalize before 7 October Lula will become ineligible. If Lula runs “sub judice” and is elected but his conviction is upheld by all courts he cannot take office and new elections are called. Lula will still be allowed to campaign and participate in TV and radio electoral time while his appeals are ongoing.

The presidential race without Lula

If Lula is not allowed to run this becomes bad news for Jair Bolsonaro (right-wing), who has been polling second as of December 2017. Lula and Bolsonaro are opposites and much of the competition between the two is exactly due to this polarity. Without Lula, the race becomes wide open again and creates more opportunity for a centrist candidate.

Market’s reaction

Following the TRF4’s decision the market reacted extremely positive to a potential complication on Lula’s candidacy. The Ibovespa stock index saw a 3.72% increase to a record high 83,680 and the dollar dropped 2.44% against the real to R$3.159.

The market’s reaction is due to the fact that with a unanimous decision Lula stays farther away from becoming president. Markets are especially worried about a Lula comeback due to his populist background and the likelihood that he could reverse ongoing reform efforts, especially labor and pension, deemed crucial for fiscal adjustments and balance of public accounts. Lula could also reverse the regulation of Petrobras (NYSE:PBR), which was recently changed such that it did not need to have exclusivity over pre-salt exploration, and which allowed for increase in foreign investment in the sector. Petrobras stock especially appreciated after the 24 January ruling.

As of right now, Lula is the main source of uncertainty for the economic future of Brazil, so the increased possibility of him not being allowed to run boosts the optimism for a pro-reform candidate.  At the same time, the appreciation of the Brazilian currency and stock exchange brings a reduction of inflation and interest rates amid a continuing economic recovery.

Categories: Latin America, Politics
Tags: Brazil, Petrobras

About Author

Lorena Valente

Lorena Valente is an Associate at Promontory Financial Group, an IBM company. Previously, she was a Consultant for the World Bank Macroeconomics and Fiscal Management Brazil Team. She has also held positions at the Inter-American Development Bank, Albright Stonebridge Group, and McLarty Associates where she performed political and economic risk analysis for Latin America, with a special focus on Brazil. She earned her MA in International Economics and Latin American Studies from Johns Hopkins SAIS, and her BA summa cum laude in Political Sciences from the George Washington University. Originally from Brazil, she speaks Portuguese, Spanish, and English. *Views and opinions expressed are the sole responsibility of the author and are not endorsed by Promontory.