Is Rouss­eff ready for round two?

Finweek English Edition - - INSIDE - BY JANA MARAIS ed­i­to­rial@fin­

The nar­row elec­tion vic­tory of Dilma Rouss­eff, Brazil ’s em­bat­tled pres­i­dent, led to a de­cline in the lo­cal stock mar­ket and cur­rency as in­vestors, who have been bet­ting on a change in lead­er­ship in re­cent months, cashed in their chips.

The Ibovespa, t he lo­cal eq­uit y in­dex, dropped as much as 6% be­fore re­cov­er­ing slightly, clos­ing 2.8% lower on 27 Oc­to­ber. Brazil’s real weak­ened more than 2% against the dol­lar to its low­est level in nine years. While t he cur­rency re­cov­ered some­what on 28 Oc­to­ber, Credit Suisse, in a note to clients, warned a fur­ther weak­en­ing is likely in the short term.

Rouss­eff, who won with a mar­gin of 3.3 per­cent­age points, the nar­row­est el e c t i on vi c t or y in Brazil in more than a cen­tury, faces ma­jor chal­lenges in her sec­ond term. Th­ese in­clude the need to push crit­i­cal re­forms to re­gain pri­vate-sec­tor con­fi­dence, con­tain­ing i nf l at ion and lifting in­fra­struc­ture spend­ing through higher do­mes­tic sav­ings, Credit Suisse said.

In her sec­ond term, Rouss­eff will have to deal with a “more frag­mented Congress, po­ten­tial reper­cus­sions of cor­rup­tion scan­dals, weak eco­nomic growth mo­men­tum and ex­ter­nal head­winds, in­clud­ing strug­gling com­mod­ity prices and a stronger US dol­lar”, it said.

In her vic­tor y speech, Rouss­eff promised di­a­logue and po­lit­i­cal re­form, in­clud­ing a change in cam­paign fi­nanc­ing and greater rep­re­sen­ta­tion for women. How­ever, crit­ics pointed out that sim­i­lar prom­ises made by her last year, after more than a mil­lion Brazil­ians took to the streets to protest against po­lice bru­tal­ity, poor ser­vice de­liv­ery and cor­rup­tion, came to naught after Congress blocked her at­tempts at re­form.

With an econ­omy i n re­ces­sion and slow­ing growth in China, a key des­ti­na­tion for Brazil ’s com­modi­ties, in­vestors and many Brazil­ians were hop­ing for an end to the nearly 12-year reign of the Work­ers’ Party. The econ­omy is ex­pected to grow by only 0.3% this year and 1.4% in 2015, ac­cord­ing to the In­ter­na­tional Mon­e­tary Fund – a far cry from the 7.5% growth achieved in 2010.

In one at­tempt to pla­cate the mar­kets, the res­ig­na­tion of Brazil’s fi­nance min­is­ter Guido Man­tega, who is leav­ing after eight years, was an­nounced. His re­place­ment will send a strong sig­nal to in­vestors on whether Brazil will be­come more business-friendly.

While Rouss­eff’s Work­ers’ Party made sig­nif­i­cant in­roads in re­liev­ing poverty by rais­ing the min­i­mum wage, cre­at­ing jobs and ex­pand­ing so­cial ser­vices like health and ed­u­ca­tion since Lula da Silva was elected pres­i­dent in 2003, Brazil re­mains the most un­equal coun­try in the world. The party also hasn’t been able to clamp down on cor­rup­tion, with of­fi­cials ob­tain­ing a court in­ter­dict to pre­vent the large-scale dis­tri­bu­tion of an ar­ti­cle be­fore the elec­tions on how it and its al­lies al­legedly ben­e­fit­ted from kick­backs from state-owned oil company Petrobas.

With business con­fi­dence at its low­est lev­els in a decade, weak in­ter­na­tional and do­mes­tic de­mand and debt rat­ings close to junk sta­tus, Rouss­eff has much to fix. Most chal­leng­ing may be to unite the coun­try after a bit­terly di­vi­sive elec­tion cam­paign, which also saw the death of pres­i­den­tial can­di­date Ed­uardo Cam­pos in a plane crash in Au­gust. Cam­pos broke from the Work­ers Party’s gov­ern­ing coali­tion last year.

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