Brazil: On to the Finish Line

With slightly more than two weeks to go until the runoff elections, the faint outline of the winner is breaking through the mist. A recent survey by Datafolha showed PT candidate Dilma Rousseff with 48% of the vote, and PSDB candidate Jose Serra with 41%. This means that only a small number of voters remain undecided, thus providing clarity to the final outcome. Of course, this is no surprise. Dilma was doing very well in the polls throughout her campaign, and most analysts expected her to win in the first round. However, a series of missteps and political scandals brought down some of her support. As a result, Dilma did not secure the absolute majority she needed to sweep past the finish line—she got only 47% of the vote. Therefore, the elections moved into a second round. Although political scandals are nothing new in Brazil, the big surprise was the ascendency of Maria Silva from the Green Party. She obtained 19% of the vote. Meanwhile, Serra locked in 33%. Despite the fact that most of the scandals and political noise centered on the PT, it seemed that the PSDB still absorbed most of the pain. It was not so much that Dilma lost votes; it was that Silva gained them. Jose Serra is a very intelligent and hard working technocrat, but he lacks the charisma and dynamism that works so well in the modern media format. Dilma’s personality is also a bit staid but she was successfully capitalized on Lula’s strong support and star-power appeal. Therefore, Brazil’s 2010 presidential elections had nothing to do with issues and national debates. There was no variance in economic agendas. It was more of a media campaign that had everything to do with image and style. Given that Lula was on one side of the fight, then the outcome was obvious from the very beginning.

Less than a decade ago, Brazil’s presidential electoral cycle was always filled with volatility and trepidation. Investors and business owners were horrified of the Brazilian Left and the possibility that Lula would win the presidency. He ran for president three times (1989, 1994 and 1998) before finally winning in 2002. The markets were so scared of Lula that Brazilian corporations were forced to insert puts, commonly known as Lula Puts, on the eve of the elections to allow investors to exit in case he won. He had such a negative perception, that the very same investment bank that today waxes lyrically about Brazil, Russia, India and China published the Lulameter which plotted the negative relationship between Lula’s support and the value of the Brazilian real (BRL). His victory in 2002 coincided with the Argentine debt crisis, and the valuation of the country’s financial assets collapsed. It took a $30 billion rescue package from the IMF to help stabilize the situation. While Lula ran on a radical campaign of renationalizing some of the privatized companies, repudiating the debt and breaking off the country’s relationship with the IMF, Lula decided to do the opposite. He implemented a major fiscal reform, accepted assistance from Washington and developed a strong relationship with the private sector—providing strategic state assistance when needed. At the same time, Brazil’s external conditions changed. China’s incorporation into the WTO turbocharged its economy and triggered a massive rise in commodity prices. At first, Brasilia thought that the spike in commodity prices was temporary. Therefore, it decided to save the windfall, leading to an increase in international reserves and a decline in debt levels. All of the factors rehabilitated Brazil’s and Lula’s perception within the marketplace, and transformed them into the heroes of the modern age.

Most people expect the next administration to continue riding the wave. A favourable perception and booming commodity prices are leading to massive inflows of foreign capital. The government is taking some steps to improve the national transportation infrastructure and social services. However, there are also concerns about the trajectory of the currency. Offering relatively high interest rates, and with a positive trend, the Brazilian real is one of the more attractive options in the emerging market currency spectrum. Yet, it is creating problems for many companies as they lose competitiveness to foreign producers and importers. Therefore, we can expect the central bank to take additional measures to limit capital inflows. This will be part of a more proactive macroeconomic and microeconomic approach. Dilma is much more dogmatic in her style, and many Brazilian businessmen fear that through institutions, such as BNDES and Caixa Economica, the government will take a more active role in private commercial, industrial and financial activities. Fortunately, the changes will be subtle and they will not do anything to deter the market’s favourable perception of Brazil.