Dilma Rousseff has announced liberal measures for the economy after re-election, but skepticism remains regarding the viability of more profound reforms as relations with the opposition reach rock bottom.
In what has been considered the most polarized presidential election in Brazil since re-democratization, Dilma Rousseff, incumbent and Workers’ Party (PT) candidate, defeated Aécio Neves, from the Social Democrats (PSDB) in the second round with a narrow majority of 51.6 percent of the votes – the party’s worst result at the polls in its 12 years in power.
Ms. Rousseff has been re-elected by promising continuity more than change. During the presidential run, she remained evasive about accusations of macroeconomic mismanagement and often evoked the global economy as the culprit for this year’s dismal growth. In the same line, Ms. Rousseff contended that inflation was under control and declared fiscal adjustment to be unnecessary. Her campaign placed instead great emphasis on the social programs currently carried out by her government, and suggested an exacerbated dichotomy between the two parties, portraying Mr. Neves as the ‘bankers’ candidate.’
Although this discourse granted PT its victory, it dramatically aggravated uncertainty among investors. The Bovespa stock index dropped 5 percent in the morning after the elections, with Brazil’s state-controlled oil company, Petrobrás, dropping over 12 percent. The government’s response came only two days later and took many by surprise: an increase in the benchmark interest rate (SELIC) from 11 to 11.25 percent.
Rhetoric aside, Ms. Rousseff is well aware of the need to regain investors’ trust. After condemning Mr. Neves’s commitment to austerity in the race for the presidency, she has found that there is no way around it.
The signs of a new political tone are visible. Other than the raising of interest rates, recent declarations point to a shift towards greater orthodoxy on Ms. Rousseff’s new economic team. The much criticized Finance Minister, Guido Mantega, is to be replaced next year and among the favourites to take his place are Henrique Meirelles, Brazil’s former Central Bank president, famously opposed to counter-cyclical fiscal policy; and Nelson Barbosa, former executive secretary at the Ministry of Finance, who resigned in 2013 for opposing fiscal practices such as the ‘creative accounting’ employed by the government at the time.
Moreover, the reduction in investments along with the increased downgrade risk has catapulted fiscal adjustment to the top of the agenda. Among the most impressive post-electoral measures are the recently announced efforts to meet the fiscal target. Ms. Rousseff has committed herself to curbing public expenses by 50 billion reals ($20 billion) in 2015 and achieving a primary fiscal surplus of 1.9 percent of GDP in 2014. The latter is bound to be especially challenging as this year’s fiscal deficit reached 15 billion reals ($6 billion) in September, the highest for the period since 1997.
Meeting the fiscal target in 2014 is Ms. Rousseff’s most immediate opportunity to signal commitment to sound macroeconomic policies to the market. PT’s loose fiscal policy has backfired in recent years. Not only has it failed to promote growth, but it also contributed to high inflation and a growing debt. The target for 2015 is even more ambitious, mounting to 2.5 percent of GDP. Among the changes announced to advance the adjustment is a cut in subsidized credit for industry next year. The news arrived after Ms. Rousseff had promised more stimulus packages days before the election.
The new measures have been interpreted as an illegitimate policy switch and were sharply criticized by the Social Democrats, aggravating the political divide in the Congress. The move is, however, not without precedents in Brazilian politics. In 1999, President Cardoso (PSDB) received similar accusations after he let the exchange rate float out of one-to-one parity with the US dollar, causing a major devaluation of the real. The change in exchange rate regime came months after Mr. Cardoso had declared the currency to be stable during his presidential campaign.
Leaving aside the implications this electoral pattern for Brazil’s democratic process, Ms. Rousseff’s policy turn is a step in the right direction. PT’s political project as it was discussed before the election was characterized by one major fallacy: the detachment between the goals of poverty reduction and economic growth. Proposals for social progress filled up the campaign and little time was devoted to discussing the deterioration of economic indicators that could jeopardize the entire social agenda.
The threat of the current slow-growth-high-inflation trap to PT’s social accomplishments was, however, hardly an unknown fact. Among the data that have been disclosed after the elections are the new findings of the Brazilian Institute of Applied Economic Research (IPEA) that revealed an increase in poverty in 2013 for the first time since 2004. Promises of adjustment, however, don’t buy any votes, as Mr. Neves has now learned.
Looking into the future, a market-friendly Finance Minister and a balanced budget are unlikely to be enough for the country to become attractive in the eyes of investors again. A change in economic model is crucial for Brazil to regain steam. The current consumption-led growth strategy has become saturated and inflationary and the long-term challenge for the new economic team is to foster production-oriented reforms. The task will however require a unified government, which means Ms. Rousseff will have to do more than building up credibility with investors – she will have to amend relations with the Social Democratic opposition if any significant change is to be seen under her mandate.
