Investors unhappy at Dilma Rouseff’s re-election

On Monday 27 October, Brazil’s shares and currency fell drastically. The reason for this was the re-election of President Dilma Rouseff. The election proved to be the closest Brazil has seen for decades, with Rouseff only beating her opponent Aécio Neves by 3.3 percent of the vote. In her victory speech, Rouseff recognised the need for change and pledged to be a “better leader” than she had been in her previous premiership. With only 54.5 million votes of an eligible 143 million, the Workers’ Party  (PT) leader could not ignore the lack of faith in her party. Not only is she facing increasing political division and growing social discontent, Brazil’s economy continues to stagnate with a disappointing level of growth anticipated for this year. Rouseff is facing mounting pressure to find an adequate solution for economic problems and is experiencing dwindling support from investors who believe she is not up to the job of re-invigorating the country’s economy.

The election result has revealed a stark contrast in opinion in the country. As expected, Rouseff has maintained her position in the poor Northern regions of the country, in part due to her party’s previous programmes which has greatly improved the poverty rate in the country. However, Neves had a clear majority in populous regions, snapping up a large proportion of the middle class vote. In the industrial hub of Sao Paulo, the Guardian reported that voters rejected Rouseff by nearly two to one. Many viewed Neves as the business friendly candidate who would pursue aggressive economic policies and bring Brazil out of its recession.

Polls did little to indicate a clear winner in the lead up to the election with the results alternating between Rouseff and Neves on a near daily basis. Both Neves and Rouseff fought the election on common ground: reinvigorate economy, invest in infrastructure and continue programmes of social inclusion. The Workers Party’s history of allegiance to the working classes would have given them the edge in some of these key grievances, in particular in relation to social aspects. The pacification programme in urban areas aimed at regaining control of the favelas from drug lords, although seen as contentious by many, has been accepted as a success in several areas. Once again however, this programme was initiated by Brazil’s previous president in 2008 rather than under Rouseff’s leadership. In some ways, the Workers Party’s aim of reducing poverty has hindered them electorally. By doing so, it has expanded the country’s middle class and the party has not adapted its policies to reflect this shift.

In the lead up to the World Cup, images of protests throughout Brazil’s major cities were littered across front pages across the world. A contributing cause to this unrest was the government’s failure to deliver the much needed infrastructure initiatives which had been promised. The catalyst for the outbreak of violence in 2013 can be attributed to the increase in prices for public transportation in Brazil’s major cities. As taxes continue to increase, the average Brazilian reports the quality of services remain poor.  Expectations were lifted on the winning of the World Cup and Olympic bids as the government made commitments to investment in public services and infrastructure. The reality was that the government overspent massively on the World Cup and these promises were broken. Rouseff has managed to isolate the middle class who have become disillusioned by her assurances.

Political corruption has become increasingly apparent in the country. One of the PT’s declarations upon election of 2002 was a promise of clean politics. However the party now looks as “sleazy as its predecessors” (Source: Guardian). In addition to the widespread corruption that is evident throughout Brazil’s inefficient political system, the overriding feeling among Brazilians is that they feel alienated by politicians. A week before the election,  Veja magazine published a story implying the involvement of Rouseff and Da Silva in a scandal involving the state owned oil company, Petrobras. The party won an injunction against the magazine preventing further details from being released but the story is just another example of the lack of transparency and corrupt dealings of Brazil’s politicians. The corruption scandals that continue to be revealed have lead to a lack of trust in the political classes.

Fundamentally, Rouseff owes a large part of her re-election to the fact that there was a severe lack of a viable alternative. While Neves appealed to businesses and the growing middle classes, he was unable to appease the concerns of the still extensive volume of Brazil’s population that continue to live on low incomes. The other candidates in the electoral race were not able to provide an option to resolve grievances of the several factions within Brazil’s society. While Rouseff’s previous presidency has been fairly lacklustre, the other leadership options failed to invigorate popular backing.

Rouseff’s challenges are heightened by increasing congressional gridlock. Following the 2013 protests, Rouseff announced she would endeavour to introduce political reform. However, once these plans reached congress, they were quickly put down. The language used in Rouseff’s victory speech was reminiscent to her reactionary speeches to the protests.  In order to get bills through Congress during her previous administration, Rouseff made agreements with right-wing politicians and various political fractions. In this election, the loss of PT seats means alliances are of even more importance in any attempts to bring reform. However, previous agreements mean bridges have been burnt leaving many questioning whether Rouseff has enough political support to push reform through Congress. In an attempt to remove these restrictions, Rouseff is now calling for a plebiscite.

Investors concerns were not appeased by Rouseff’s inaugural speech as they remain sceptical whether a swift recovery can occur following four years of ineffective industrial measures. The main index on Sao Paulo’s stock exchange fell more than 6 per cent in first half hour of trading on Monday (Source: Wall Street Journal), shares in Petrobras fell 15 per cent and the country’s currency saw its worst day in nearly 10 years. Many believe she will be unable to boost the economy while expanding social benefits as she has promised. During the months running up to the election, Rouseff maintained that her party would protect the poor and painted Neves as pursuing the interests of international financiers. While she claimed that the reason for economic stagnation was due to global constraints, investors regard her welfare heavy, state centric policies as the main contributing factor.

In announcing a new finance minister, Rouseff may be able to reassure investors.  Bruce Brewington, a portfolio manager at Forward Management LLC in San Francisco said he would look for buying opportunities if Rouseff commits her government to initiatives such as comprehensive infrastructure investment leading to an improvement in Brazil’s roads and ports and heightening its attractiveness to businesses. This approach would also benefit Rouseff in terms of popularity by addressing the grievances of those protesting in 2013.

How Dilma Rouseff acts in these coming weeks will decide her fate. If she announces an agreeable finance minister who investors believe may be able to reverse the recession and push Brazil to become a key global player and emerging power, she may be able to salvage her poor economic reputation. However, if she continues on a similar path as she did within her previous presidency, she could push the nation deeper into recession and face total congressional gridlock in trying to pass any reform. In order to save the reputation of the Workers party, Rouseff has to rise to the challenge of addressing grievances and take control of the economy. If she fails to do so, the Workers Party could be heading for extinction. The tight election result means that Rouseff can no longer claim that she is answering to the people not the market. The people have spoken and have let their displeasure be known. And as for the investors, their disappointment at the electoral result is evident in the figures reported on the stock exchange last Monday.

By Sophie O’Donoghue

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Categories: Latin America

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