Q&A: What is the outlook for Brazil's runoff election?

SAO PAULO Mon Oct 4, 2010 3:04pm EDT

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SAO PAULO (Reuters) - Dilma Rousseff's failure to win enough votes in Brazil's presidential election on Sunday to avoid a runoff has prolonged the campaign by four weeks and given opposition challenger Jose Serra renewed hope.

Following are some questions and answers on the election landscape and how the runoff vote on October 31 could play out.

COULD ROUSSEFF LOSE IT?

That is unlikely, barring a new corruption scandal that implicates her directly or the formation of a firm alliance between Serra's centrist PSDB party and supporters of Green Party candidate Marina Silva, who was eliminated despite a strong showing on Sunday.

Rousseff, a pragmatic former leftist militant from the ruling Workers' Party, can still count on the hugely influential support of President Luiz Inacio Lula da Silva, who has public approval ratings of around 80 percent and has overseen Brazil's biggest burst of economic growth in three decades.

Despite staying in the game on Sunday with 32.6 percent of the votes cast, Serra has failed to inspire most Brazilians with a campaign in which he has landed few significant blows on Rousseff or Lula. All opinion polls ahead of Sunday showed Rousseff beating Serra handily in a second round.

Rousseff drew 46.9 percent of the vote on Sunday but fell short of the majority needed to win outright.

Serra's best hope is an endorsement from Silva, who forced the second round by winning 19.3 percent of the vote -- much higher than polls had forecast. Upcoming opinion polls will be crucial to assess whether Rousseff's support has found a floor after its late slide on a corruption scandal and concerns over her views on social issues such as abortion.

WHERE WILL MARINA SILVA'S VOTES GO?

The early indications are that Silva, who served as Lula's environment minister until 2008 before quitting the Workers' Party, may remain neutral. But the Green Party appears more likely to lean toward Serra's party.

A survey by pollster Datafolha shows that Serra would be the biggest beneficiary of Silva's dropout, winning 51 percent of her votes while Rousseff would pick up 31 percent.

According to calculations by the Eurasia Group, a political consulting firm, Rousseff would still have a lead of more than 7 percentage points even if Serra manages to attract up to 68 percent of Silva's votes.

While that lead would seem small compared to her previous 20 percentage point advantage over Serra, it would be hard for Serra to overcome, Eurasia said in a report on Monday.

Despite her humble background, Silva did better among middle-class voters -- who tend to be natural Serra supporters -- than among poorer people. Still, a solid chunk of Green Party members and supporters tend to be more ideologically in line with the left-leaning Workers' Party than with Serra's slightly more centrist, free-market stance.

Serra has started courting the green vote. Both candidates will play up their environmental credentials in the remainder of the campaign.

Another crucial factor is whether the evangelical Christian voters who appeared to turn to Silva in large numbers in recent weeks will now favor Serra due to their concerns over Rousseff's positions on abortion and other social issues.

Rousseff has faced a flood of Internet-driven rumors, some unfounded, about her comments on religious issues. While that could continue to erode her support among evangelicals, who make up about 20 percent of the electorate in heavily Catholic Brazil, Lula's governing coalition includes powerful religious leaders who have already been employed to defend Rousseff.

WILL THE CANDIDATES CHANGE THEIR PROPOSALS?

Rousseff has little incentive to change her central message of continuity from Lula that, after all, gave her a strong first-place finish on Sunday. Given the need to attract Green Party voters, she may stress more heavily her concern for the environment despite being known mostly as a strong proponent of development in sensitive areas such as the Amazon rain forest.

There is much more pressure on Serra to reinvigorate his campaign with fresh policies and energy. In the final weeks of the first-round campaign, he announced he would raise the national minimum wage substantially in an apparent bid to combat Rousseff's strong support among poorer voters.

The Serra camp could also rely more on Aecio Neves, a popular former governor of Minas Gerais state who many think will run for president someday, to rally voters in the runoff. Neves, who was elected to the Senate in a landslide on Sunday, had been reluctant to campaign aggressively for Serra while his congressional seat was still in the balance.

WHAT ARE THE IMPLICATIONS FOR MARKETS?

Markets hate uncertainty, and the surprise of Rousseff's weaker-than-expected performance could cause unease among some investors.

There will be no wild swings given that neither candidate is proposing radical changes from current economic and financial policies, but market nerves could be frayed if the rhetoric heats up in the coming weeks and the race tightens.

The extension could put further upward pressure on Brazil's currency, the real, which has surged to two-year highs on a flood on foreign inflows and rose again on Monday. Some analysts think Lula's government may put off policies to stem the real's rise for fear they may hurt Rousseff's chances.

The painfully strong currency could become a major focus in the runoff, prompting the candidates to compete over how best to curb its strength, which is hurting exporters.

The real could come under selling pressure if Serra starts narrowing the gap on Rousseff. He has taken a much stronger stance than her on the need to reduce Brazil's double-digit interest rates.

(Editing by Todd Benson and Will Dunham)

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