In the run-up to Brazil’s elections last October, the stockmarket rose as investors betted on Rousseff losing power. That didn’t happen but now many are viewing her narrow victory as the next best thing. During her first term Rousseff presided over an economic nightmare that saw growth go from 7.5% in 2010 to practically 0% in 2014. Of course it wasn’t all her fault. External factors, such as slowing commodity prices, weighed in on growth, while at home a maturing credit cycle hit consumer demand. But investors did blame Rousseff for an interventionist economic policy that saw the state heavily involved in key sectors of the economy. Meanwhile international bondholders became dismayed by the ‘creative accounting’ that saw Brazil stick to its fiscal targets in name more than spirit.
But since Rousseff won the election early signs have been positive. Her first move was to appoint former Bradesco Asset Management CEO, Joaquim Levy, as finance minister. The former investment banker immediately pledged to improve the country’s struggling public finances, pleasing bondholders and ratings agencies. The plan is for a 1.2% primary surplus in 2015, followed by a 2% surplus in 2016, which is expected to be maintained in subsequent years. Another key appointment was Nelson Barbosa, a respected economist, as planning minister. He will be in charge of directing Brazil’s huge infrastructure programme, whose successful execution is vital if the country is to remove one of the biggest bottlenecks to improve productivity.
It’s still too soon for investors to celebrate, as the very reason for these appointments may also be their weakness. Rousseff’s narrow election victory forced her to rely on a wider network of allies and concede changes to economic policy. Yet many of her traditional supporters are unhappy with the new appointments. For example Barbosa’s first announcement – a plan to revise the calculation of the minimum wage – was hastily retracted one day later. Local press reports claimed that unions had persuaded Rousseff to overrule her minister – not an encouraging start. Only time will tell how much policy really shifts.