Brazil Politics

Brazil

Brazil: After the election: Rousseff navigates a divided Brazil

November 11, 2014

Current President and Workers’ Party candidate Dilma Rousseff was re-elected for a second term on 26 October by the narrowest margin in Brazil’s modern election history. Rousseff won 51.6% of the vote, putting her just barely ahead of opponent Aécio Neves, the Brazilian Social Democracy Party candidate, who received 48.4% in the second-round runoff. Rousseff will now have to steer a divided Brazil forward as she attempts to boost the slumped economy while also lowering inflation and delivering promised political reforms.

The future of Brazil’s economic policy dominated the presidential debate and Rousseff’s largest criticism from opponents was her handling of the economy. Brazil, Latin America’s largest economy, has performed below expectations in recent years and the country is in a technical recession. In addition, inflation has risen above the Central Bank’s tolerance margin and both the current account deficit and fiscal deficit have broadened. Turning around the economy will be a tough task and will require some key reforms. The first priority for Rousseff is to appoint a component finance minister to replace Guido Mantega, who will not continue next term. Second, the government will have to adjust fiscal targets and reduce spending going forward, particularly if it hopes to maintain the country’s investment grade status and increase confidence. Finally, Rousseff will need to deliver the promised and much-needed political reform, including new regulations to reduce corruption and increase accountability among politicians.

The extent to which Rousseff’s government is willing to adopt the needed changes is unclear. During the election campaign, Rousseff signaled that she wouldn’t drastically alter policy, blaming Brazil’s weak performance on external factors. However, following her narrow victory, the government has shown a greater willingness to combat the economy’s underlying weaknesses. The Central Bank raised the SELIC rate by 25 percentage points to 11.25%, which the market had not expected, and illustrated a stronger commitment to fighting inflation. Further, the government acknowledged that it would not meet fiscal targets for 2014 after having recorded the largest primary fiscal deficit on record in September. The admission is a positive sign that the government may adopt more market-friendly policies to improve the deficit going forward.

In addition, Rousseff will face the challenge of trying to govern a divided Brazil with relatively low political support. Rousseff’s victory came largely on the back of votes from north and northeast Brazil—poor and less educated areas which benefitted greatly from the Workers’ Party’s large social welfare programs. Rousseff will face a strong opposition, led by Neves, who won most of the richer southern and central parts of the country, including Sao Paulo, which accounts for one-third of Brazil’s economy. In addition, Congress is more divided than before with 28 different parties represented, up from 23. As David Beker and Ana Madeira, Brazil Economists at Bank of America Merrill Lynch, point out:

“We expect Rousseff to implement a paced adjustment in her second term. We expect her next administration to tighten fiscal policy, although gradually. The BCB is expected to maintain some degree of FX intervention in order to smooth volatility. With the opposition increasing its share in Congress and its composition becoming more fragmented, it will be more difficult for Rousseff’s second administration to approve reforms, in our view.”

Looking forward, it remains unclear whether Rousseff’s government has the ability or willpower to turn around the economy. LatinFocus Consensus Forecast panelists expect the economy to expand 0.3% in 2014, which is unchanged from last month’s estimate. For 2015, the panel sees GDP growth at 1.1%, which is down 0.2 percentage points from the previous month’s estimate.


Author: Angela Bouzanis, Senior Economist

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