Once regarded as a coming global power, Brazil has recently found itself warding off questions surrounding government intervention in the market by incumbent candidate Dilma Rousseff, all the while desperately trying to hold down an inflation rate that is hovering just below 7%. Whoever wins Sunday´s election will have an array of policy issues to tackle with respect to the countries spluttering economy.
Brazilian exchanges have been extremely volatile over the past number of months, mirroring the twists and turns of an election campaign which has been compared to a Brazilian telenovela. Yet the choices and consequences for Brazil are altogether more serious.
The volatility in Brazilian markets has been closely aligned with the topsy-turvy nature of the campaign. Aecio Neves, the head of the Socialist Party and pro-business candidate, edged ahead earlier this week, having received the support of Marina Silva, the beaten candidate in the first round of elections.
Yet the latest polls show that Rousseff has belatedly gained the support of a somewhat skeptical electorate. That support is a polar opposite from what has been happening on markets, who have been unambiguous about the desire to see a change of government. As if to emphasise the point, the BDP dropped 3% on Wednesday, as opinion poll results showed a surge of support for Rousseff, taking her three points clear as polling day draws closer.
This reflects a level of suspicion on trading floors surrounding Rousseff´s interventionist tendencies, the President previously having kept fuel prices artificially low as well as having failed to tackle the country’s structural problems.
Neves has vowed to increase energy prices should he win the election, a move that would likely restore some market confidence.
Yet analysts inside the country say that it is Dilma’s hands-on approach to running the economy that is likely to win her re-election. They point to a social policy that has done much to improve conditions for Brazil’s poor, whilst also noting that the country is due a large windfall from the energy sector over the coming years, a largesse Dilma has promised to further improve education and health.
Analysts note that a Neves win would likely mean “that if government intervention in the economy ceases and business recovery happens swiftly, then headline GDP growth could increase 90bp next year,” according to Bruno Rovai, an emerging markets researcher at Barclays commented.
And in the case of a Rousseff victory:
“In the short term, we don´t foresee a massive sell off in Brazil regardless of the outcome. On the rates side, we would expect to see a steepening of the yield curve should Rousseff get re-elected.” he added.
Brazil´s voters appeared desperate for change, as was evidenced by the vast street protests which swept the country in 2013. Concerns about poor infrastructure and perceived government corruption were cited as catalysts for the protests. While such issues remain of concern to the electorate, voters appear reluctant to throw their lot in behind Neves. Rousseff appears on the cusp of gaining re-election, a victory owed to the very policies for which she had been so vehemently criticized. The markets will not be pleased.
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