For investors in Brazil, the re-election of President Dilma Rousseff with 51.6% of the vote in a runoff, indicates that the nation is divided on what future political course their country should take. It will have serious economic consequences. Although Ms. Rousseff promised to reunite the nation after a acrimonious political battle with her rival Aecio Neves, she never mentions him by name. Brazil is facing some serious economic challenges that can totally derail growth. If this happens not only will it damage the President and her leftist Workers Party (PT), it will also jeopardize many of the cherished programs that they promote. PT has been in power for 16 years and the patience of the Brazilian middle class is beginning to wear thin. The slim majority that PT holds in the National Congress reflects this.
Aecio Neves from the center right, was encouraging a change in course for Brazil. He wished to promote business and investment to help the Brazilian economy to grow faster, than it has most recently. Growth is forecast to slow even further in 2014. It is now predicted to grow a mere 0.2% for the year and may indeed slip into recession in 2015. At the moment growth is expected to be just 0.80% next year. This does not bode well for the Administration of President Rousseff. It also explains why Mr. Neves won easily in the south and southeast parts of the country which is where most of the economic growth and activity in Brazil takes place.
After Ms. Rousseff’s victory the Central Bank raised its key interest rate from 11% to 11.25% as a way to combat inflation which is getting out of hand (6.7% official rate). The President most likely delayed the rise for political reasons. The beginning of her second term is not off to a good start. Her political victory is the narrowest in modern electoral history in Brazil. She won by a mere 3% of the vote. The failures of her first term are all too evident.
The President in office since 2011, will need to refocus her energies on economic and monetary issues. If she is unable to turn the economy around, her second term will end far worse than her first one. The memories of 2013 mass street protests, which were in response to charges of corruption and deplorable public services are likely to be repeated. More troubling for Ms. Rousseff is that the widespread complaints are increasingly coming from the middle class.
Her first step on the economic will be to appoint a finance minster who will have a daunting task ahead of him. Ms. Rousseff will need to stop meddling with the economy for short term political advantages. The road ahead will be difficult. Along with rising inflation and a punishingly high interest rate is the dramatic increase in public debt. This coincides with the widening current account deficit which is now at 3.7% of GDP (Gross Domestic Product). It is now at its highest shortfall since 2002.
The President will not have much time to set things right. A looming downgrade in Brazil’s credit rating is already in the cards with further downgrades likely as the economy swoons further. Her mandate for change and reform will be difficult to achieve given her predilection for increasing state control over the economy. It does not help that the newly elected President feels that political reform and corruption seem to take precedence over economic restructuring.
The only path forward is to attempt tax reform, which can reinvigorate business and investment. Private investment made in the collapsing infrastructure, will reduce the liability of the government in maintaining such services. The federal budget deficit is running at 4% of GDP already. It is at a 5 year high.
Lower trade barriers would also give a boost for more business and investment activity.
The first mini steps of the government are not encouraging. Although the President continues to promise political reform she seems unwilling to really tackle the inefficiencies and corruption at this level. Her continued interference in the state oil company Petrobas will need to diminish as well. The firing of corrupt ministers at the beginning of her last term was received by the public as a positive move. Unfortunately, she did not leave it there. Ms. Rousseff has continued to interfere in the management of the institution in addition to making business decisions that are not sustainable in the long run. For example, having the public company buy oil in the international market for a higher price than they are allowed to sell it for in the Brazilian marketplace.
The temptation for the government will be to tighten its grip on the economy and political system. Some in her party are already pushing for more curbs on media outlets. This is in stark contrast to the situation at the beginning of her last term. However, it is important to note that the press coverage was more favorable then.
The advantage of remaining in power are immense for Ms. Rousseff. By 2015, she will have appointed the majority of the Supreme Court judges and her influence throughout the federal and state bureaucracies is immense. As her grip tightens, it leads to the very corruption that she claims to abhor. Political allies and clients are showered with state favors and money, whereas opponents are punished.
Ms. Rousseff can point to some of her Party’s accomplishments which include rising wages for many Brazilian workers and record low unemployment. Although inequality is on the decline, there is still mass poverty in some regions of the country. This is especially true in the north and northeast. This is incidentally the regions where the President garners the majority of her support.
Her mentor and predecessor Lula da Silva, has no doubt encouraged his successor to be more business friendly. A strong economy is the only way to pay for the socialist policies of the present government. The Bolsa Familia which provides a vast government network of federal assistance to the poor families of Brazil, requires vast infusions of money. The program is the largest conditional cash transfer system in the world. The goal is to provide both short term and long term assistance to the neediest members of Brazilian society.
It will also be the only way to preserve the investment grade credit rating, achieved by former President Lula da Silva in 2008. However, her election campaign sounded mostly left wing in its tone. It is no wonder that the Brazilian real reached a 9 year low against the dollar, upon her re-election. The stock market also declined by 6%. There has been somewhat of a recovery since then, but it is obvious that investors and the business class both domestically and internationally, have little confidence in the economic policies of President Rousseff.