FACTBOX-Key political risks to watch in Brazil

By Raymond Colitt

BRASILIA, Sept 1 (Reuters) - Ruling party candidate Dilma
Rousseff looks set to win Brazil's presidential election next
month and is expected to hold in place most economic policies,
but she could strengthen the state's role in specific sectors.

Heavy government spending, oil policies and the new balance
of power in Congress after the presidential election are among
the risks to watch in Brazil over the next year.

PRESIDENTIAL ELECTION

Opinion polls show Rousseff likely to comfortably win the
Oct. 3 election over the main opposition candidate, former Sao
Paulo state governor Jose Serra of the centrist opposition PSDB
party [ID:nN2897578].

Rousseff, President Luiz Inacio Lula da Silva's former
chief of staff, has surged in polls in recent weeks on the back
of a booming economy and Lula's enormous popularity.

Unlike previous races, there is no clear market favorite
because neither of the main contenders is expected to break
with the mostly market-friendly policies in place for the past
decade.

Still, Rousseff and Serra both favor strong government and
could heighten state intervention in various parts of the
economy.

Eager to win over centrist voters and avoid unsettling
investors, Rousseff has emphasized market-friendly
macroeconomic policies. But she would heighten the role of
state enterprises in strategic industries such as oil,
telecommunications, and power.

Serra, on the other hand, has suggested a bigger government
role in monetary and currency policies, raising concern in
financial markets. [ID:nN29257620].

As a result, equity investors in strategic industries could
face larger risks with Rousseff, while fixed-income and
currency investors could see more change with Serra.

Uncertainty over the state's role under Rousseff could
undermine investor appetite for planned equity issuances,
including a massive capitalization plan by Petrobras.

Serra has called for lower interest rates and said the
currency was overvalued and that the central bank needed to
follow the government's economic policy. [ID:nN10198404]

Rousseff, a former left-wing activist, has praised the
central bank and pledged continuity. She has said the bank
should keep focusing on controlling inflation in coming years
before it could consider economic and job growth when setting
monetary policy.

There is also some doubt about how firmly the candidates
would push for a second generation of structural reforms to
ensure Brazil's international competitiveness if elected.

Both agree on the need to overhaul Brazil's complicated tax
system to encourage investment but have provided few details.

Serra wants to reform the pension system by cutting
benefits for some civil servants, while Rousseff has played
down the need for far-reaching reforms any time soon
[ID:nN31260537].

Neither proposes nationalizing private companies but
Rousseff's proposal to strengthen state firms could weaken
private sector participation in banking, oil and utilities.

Rousseff has said growth of state banks would not infringe
on private banks, which she said were necessary to drive
economic expansion and spur competition.

Government plans to use state-owned telephone company
Telebras (TELB4.SA) to expand broadband Internet access have
moved its shares and could also affect share performance of
private telecoms depending on their participation in deals.

Lula also wants to strengthen state-owned power company
Eletrobras (ELET6.SA), though the intent may be to expand
mostly abroad.

Serra is widely believed to be the tougher of the two main
candidates on fiscal discipline [ID:nN25443706]
[ID:nN26210019].

Rousseff has pledged an ambitious primary budget surplus
target of 3.3 percent of GDP but, wary of risking her large
poll lead, has been noncommittal on unpopular budget cuts
[ID:nN26231364].

What to watch:

-- Details of Rousseff proposals for state enterprises.

-- Signs Rousseff is preparing austerity measures to meet
her budget target early in office.

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For full coverage of Brazil's election: [ID:nBRAZIL]

For a graphic on all polls: link.reuters.com/vux47n

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GOVERNMENT SPENDING

The government is maintaining a high level of spending
before the election, potentially fueling inflation and forcing
the incoming president to adopt austerity measures.

Public spending rose sharply in 2009, eroding the primary
budget surplus to an eight-year low of 2 percent of gross
domestic product. Finance Minister Guido Mantega has pledged to
pursue a surplus of 3.3 percent of GDP in 2010 but in the 12
months to July it was only 2.03 percent.

What to watch:

-- Continued weak monthly primary surplus figures would
indicate worsening fiscal discipline and could push up interest
rate futures. <0#DIJ:>

-- Signs Lula could tighten spending after the election to
spare Rousseff unpopular austerity measures

OIL AND GAS

Uncertainty has grown over an oil-for-shares swap linked
with a massive stock offering by Petrobras (PETR4.SA)(PBR.N)
scheduled for September.

The government has been at odds with Petrobras over the
price of the oil it would transfer as part of the
capitalization program.

For Petrobras, which needs cash and the oil to undertake an
ambitious plan to tap billions of barrels of oil in deep-sea
ocean waters, a price higher than $6 could make the venture
costly and risky and send its shares lower [ID:nN26243103].

Already, the government's legislative framework to tap the
new-found oil riches has been held up in the Senate and won't
be voted on until after the election.

The proposal aims to increase state control over some of
the world's biggest recent oil finds and ensure their proceeds
help bankroll state investments in areas like infrastructure,
education and poverty-reduction programs.

If approved, the measures will likely reduce competition in
the sector while boosting the role of state energy giant
Petrobras, offering fewer but still attractive opportunities
for foreign investors. [ID:nN01485799]

Critics say the laws threaten the efficiency of Brazil's
successful oil sector by stifling investment and increasing the
dangers of political interference and corruption.

What to watch:

-- The price Petrobras must pay in the oil-for-shares
swap.

-- Signs that Congress can agree on how to distribute oil
revenue between the federal government and states, paving the
way for approval of the oil bills after the election.
[ID:nN26161706]

CONGRESSIONAL SUPPORT

Rousseff's coalition is expected to win a clear majority in
Congress and advance her legislative agenda. But progress will
depend on how well the inexperienced Rousseff can deal with
often unruly allies [ID:nN31185725].

If Serra were to win the election, the Lula administration
could lose its majority in Congress as "swing" legislators
migrate to the president-elect's camp. This could create a hung
parliament with little chance of approving major bills before
Lula leaves office on January 1.

CORRUPTION

Mud-slinging and corruption scandals tend to surface during
Brazilian election campaigns and have the potential to paralyze
Congress and harm the leading candidates. Lula himself came
close to facing impeachment proceedings in 2005 when his party
was involved in an illegal campaign-financing scandal.

FOREIGN POLICY

If elected, Serra is likely to cool ties with some of
Lula's left-wing allies in Latin America. That could affect
energy investments in Bolivia and Venezuela, where Lula had
prodded Petrobras to invest to foster regional integration.

Serra recently accused the Bolivian government of turning a
blind eye to cross-border drug trafficking. He has also
criticized Venezuela for allegedly harboring Colombian rebels.
Some analysts think Serra could take a harder line in trade
disputes with Argentina and the South American trade block
Mercosur.

Rousseff, by contrast, has pledged to continue current
foreign policy and could name the current deputy foreign
minister, Antonio Patriota, as Brazil's top diplomat.
(Editing by Kieran Murray)