This election could be a major turning point for Brazil
Brazil, the region’s biggest economy and home to 200 million people, is in the midst of a tense election. Dilma Rousseff, the incumbent president and leader of the left-wing Brazilian party Partido dos Trabalhadore, was struggling. Over the last few years, dissatisfaction with her government’s miserable economic record has started to chip away at her support. But nevertheless she managed to fight back to win the first round last Sunday. However, the big shock was that pro-business candidate, Aécio Neves, managed to secure second place and earn himself a run-off with Dilma later in the month.
This presidential race will have a huge impact for investors in Latin America so it’s worth taking a closer look…
Since Rousseff came to power, there have been considerable problems with the Brazilian economy. To get a clear picture, we need to look back to Rousseff’s predecessor Lula da Silva, who won the presidential election in 2002. In the run-up to the 2002 election, Lula scared the elite with his campaign of socialist rhetoric. Yet, when he came to power, he managed to combine a progressive agenda with pro-growth policies. The economy boomed, while a massive system of wealth transfer helped around 50 million Brazilians climb out of poverty.
Unsurprisingly, he was pretty popular with the voters. By the time the election came in 2010, he was not able to stand for a third consecutive term, so in his place, he put his protégé, Rousseff. And that’s when the problems started.
Soon after Rousseff came to power, the Brazilian economy stalled, with GDP growth going from 7.5% in 2010 to the current recession. Meanwhile, discontent grew about the country’s endless corruption scandals, the government’s seeming preference for vanity projects such as the World Cup rather than public services, and increased state meddling in the private sector. Of course, not all of this is Rousseff’s fault. After all, it was Lula that applied for the World Cup, and his administration engaged in just as much corruption and meddling as hers has. And as for his economic miracle, in hindsight, that was largely down to a commodity price boom rather than shrewd policy-making. But while the economy was booming, most of the country was happy to ignore those traits. It’s only now, with the economy mired in recession, that the criticisms have become more vocal.
To be fair to Rousseff, she knows all of this. For the last few years, she has been desperately trying to kickstart the Brazilian economy. But to no avail. The government’s initial response was a classic combination of monetary and fiscal easing. But these ‘pro-growth’ policies failed to work. “These policies help stoke demand, but Brazil’s problem was supply”, explains Nomura analyst Tony Volpon. “Its manufacturers are uncompetitive, so all the extra demand created just boosted imports.” And that has led to a worsening current account deficit. Indeed, credit ratings agencies are so worried about Brazil’s macroeconomic position that Moody’s recently changed its outlook from neutral to negative, while Standard and Poor’s downgraded Brazil’s credit rating back in March. Most pundits agree that Brazil really needs to enact deep structural reforms that would make its firms more competitive. Improving infrastructure, increasing transparency and cutting import tariffs would all help to reduce costs for businesses.
Can Neves fix things?
He has promised to relax the regulated prices for key items such as fuel that are causing such massive distortions in the economy. He is also pushing for market-friendly measures, such as a new law to ensure the independence of the central bank. Neves is also looking to cut state spending, which would improve Brazil’s macroeconomic position. And, perhaps most importantly of all, he wants to stop the currency interventions, which have kept the real strong and hammered Brazil’s manufacturers.
It doesn’t take a genius to see that a Silva presidency could be good for those investing in Brazil. Indeed, the local market, the Bovespa, has been buoyed by her climb through the polls.
But there is also potential for regional consequences. Brazil is part of Mercosur, a more protectionist trade group which counts Argentina, Venezuela, Paraguay and Uruguay as its members. Membership of this group has prevented Brazil from signing free-trade agreements with major markets such as the EU and the US. Yet, if elected, Neves has promised to change tack and start making deals.
What’s happening in Brazil right now is indicative of what’s going on across the region. Most parts of Latin America had a great start to the century as the commodity boom and a positive credit-cycle fuelled growth. However, with commodity prices falling back now, these countries need to boost productivity if they want the good times to continue. The Pacific Alliance countries have long been investor favourites in the region, because it’s clear that they are enacting these reforms. If Neves wins the election and is able to deliver some of her campaign promises, maybe we will be able to add Brazil to that list.