Monday, October 27, 2014 9:34:10 AM
http://www.forbes.com/sites/chriswright/2014/10/27/rousseff-wins-a-second-term-in-brazil-and-investors-are-nervous/?partner=yahootix
She’s back. Dilma Rousseff won the second-round runoff of Brazil’s presidential election on Sunday, to scenes of celebration in São Paulo. But she won’t get to celebrate for long, because the list of challenges facing the country is as long as in any other emerging market.
One, the economy. Rousseff and her finance minister Guido Mantega consistently promised growth of 4% a year, not all that much for a BRIC economy, but in any case they consistently missed even that target by a mile. The FT crunched the numbers and calculated that during her four year first term, Mantega over-estimated forecast growth by an average of 2.77 percentage points a year. Instead of growing, Brazil is amid a recession without a clear path out again.
“Rousseff retains the reigns of an economy in the midst of a recession, with above target inflation and a fiscal position that risks pushing the country’s debt into junk status,” says fund manager Alquity, which argues that Brazil’s problems are so bad it wouldn’t have made much difference no matter who won. “Whichever way the results played out on Sunday, there were inevitably tough times ahead. Whilst a Neves victory may have inspired a temporary rally, the undeniable need for currency depreciation, subsidy removal and government spending cuts would have bitten eventually. Rousseff must now cope with an even more divided congress and senate than under her previous mandate.”
Her administration has already stepped in to control fuel prices, and to manipulate the currency, which may have had an effect in the short term but has done nothing to support investor confidence. Besides, this fiscal stimulus might have been rational if it had prompted growth, but it has not, and instead has increased the chance that Brazil could lose its investment-grade credit rating, with inflation now well above the central bank’s target at 6.5%. Brazil’s stock market dropped almost 8% last week in the run-up to the election outcome. It’s not likely to soar up when the markets open today. A downgrade would increase Brazil’s borrowing costs and make everything worse still.
On top of this, the margin of victory was so small, and the campaign so fractious, that it will be even harder for Rousseff to get anything done than it was in her previous term. And in addition to the lack of a decisive mandate, the government is also under pressure because of allegations that some of its senior figures accepted kickbacks in exchange for the awarding of contracts around Petrobras, the vast but beleaguered oil and gas company.
There is not a lot of enthusiasm in the investor community that Rousseff can deal with these challenges. But there is one point of consensus: that she has to do something different to what she has done before. Because more of the same just won’t work.
"Then there was a woman, a lion of a woman."
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