Major Policy Shifts in Next Rousseff Term Unlikely

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – President Dilma Rousseff’s narrow victory in last Sunday’s presidential elections has reduced the hopes of economic analysts that in the next four years the government will produce the economic policy reforms Brazil needs to restore investor confidence and resume economic growth.

“Growth in Ms. Rousseff’s first term in office was already the weakest under any president since the early 1990s and, in the absence of a major shift in policy in her second term, we expect more of the same over the next four years,” says Neil Shearing, Chief Emerging Markets Economist at Capital Economics.

Financial markets, meanwhile are anxiously awaiting the announcement of who will replace Finance Minister Guido Mantega as of January 1, 2015 and what steps the Rousseff administration might take to tackle the country’s problems of high inflation and a deteriorating fiscal position. There have been media reports which suggest that Mantega’s replacement will be more pro-business. “This could help to ease concerns over Brazil’s fiscal plight, as well as the tendency towards arbitrary tax and spending measures in recent years,” says Shering.

Carlos Caicedo, senior principal analyst for Latin America at IHS Country Risk, however, says that even if Rousseff changes to a more pro-business cabinet, the likelihood of ample structural reforms are not very high. “The Rousseff government has shown little appetite for tax, labor, and pension reform.”

Neil Shering agrees. “The reforms that are needed to move Brazil from a consumption-led to an investment-led growth model mean shifting income from ordinary workers – which form Dilma’s core support – to companies.” According to the analyst, a big shift such as that in policy seems unlikely since it would require the President to take on vested interests within her political base.

Therefore, it is very likely that we will see more of the same in terms of economic policy. For Caicedo this means that economic growth in Brazil for the next four years is likely to come in below potential. “The private sector and foreign investors are likely to remain cautious about the Rousseff government’s ability to control inflation.”

This week has been a rollercoaster for Brazil’s financial markets. The day after Rousseff’s narrow victory, the country’s stock market (Bovespa) tumbled by as much as 6.18 percent during the morning trading hours and closed down by 2.77 percent, at 50,503 points. Shares from some of Brazil’s largest state-controlled companies (Petrobras, Eletrobras and Banco do Brasil) declined as much as twelve percent. The U.S. dollar appreciated by 2.68 percent in a single day and the foreign exchange rate closed at R$2.5229/US$1.

On Wednesday, another surprise: Brazil’s Central Bank (CB) Copom (Monetary Policy Committee) increased the benchmark interest rate by 25 basis points to 11.25 percent, its highest level since November 2011. But despite some early morning volatility on Thursday, the Bovespa Stock market closed the day up by 2.52 percent and the U.S. dollar fell against the Brazilian real by 2.45 percent to R$ 2.40/US$1.