FACTBOX-Key political risks to watch in Brazil
BRASILIA Dec 1 (Reuters) - President-elect Dilma Rousseff has gone a long way to allay investor concerns over slipping fiscal discipline and central bank autonomy since her Oct. 31 election victory, naming an experienced economic team that suggests economic policy continuity.
But the career technocrat, who has never held elected office before, has yet to prove she can deliver on her pledges in the face of likely opposition to austerity measures from ruling party supporters, including workers and pensioners.
Risks that investors will face in Latin America's largest economy over the next 12 months include slowing economic growth, heightened intervention to stem a currency rally and an increased role of the state in key industries.
NEW ECONOMIC TEAM
In a clear sign of policy continuity, Rousseff, a former chief of staff and energy minister under President Luiz Inacio Lula da Silva, has nominated a well-regarded central bank director, Alexandre Tombini, to head the central bank and said Guido Mantega will remain as finance minister. [ID:nN24291726]
Tombini, who was instrumental in helping devise the current inflation-targeting scheme in 1999, said Rousseff assured him the central bank would have full operational autonomy. Mantega told Reuters that the current inflation-target of 4.5 percent could be lowered after 2012.
Still, Mantega's credibility as a guardian of fiscal discipline has been tarnished in the last two years as current expenditures rose sharply and the government resorted to creative accounting to meet its target.
Also there are lingering doubts whether Rousseff would exert political pressure on Tombini to lower interest rates.
After naming her economic team and presidential staff, Rousseff's biggest test will be to accommodate allies vying for ministries with the potential for pork barrel spending. Her ruling Workers' Party is also competing with the centrist PMDB, the biggest in her alliance, for the leadership in both houses of Congress. An acrimonious dispute between the parties could sour relations in Congress, hurting Rousseff's chances of approving her legislative agenda.
What to watch for:
-- Senate approval of Tombini's nomination.
-- Signs of political pressure on the central bank.
-- Remaining appointments of her cabinet.
Perhaps one of the biggest risks for foreign portfolio investors in Brazil is the prospect of measures to stem capital inflows and thereby prevent a further appreciation of the real BRBYBRL=. The Lula administration hiked the so-called IOF financial transactions tax on foreign purchases of local bonds twice in October to 6 percent and Mantega has said he could take further measures if the real began strengthening again.
With Brazil's trade surplus shrinking and pressure from business leaders and exporters building, Lula and Rousseff have said they will take whatever measures necessary to defend Brazil's interest in what Mantega dubbed the "global currency war." [ID:nN17208404] [ID:nN1292209]
The leading industry lobby wants the government to require foreign investors to keep their funds invested in Brazil for a minimum time period and to tax their capital gains.
Sectors like electronics, white goods and cars have begun replacing domestic production with imports.
What to watch for:
-- An appreciating currency and pressure from exporters.
-- Tax and tariff reductions to help struggling industries could help share prices in selective industries, such as steel, textiles and electronics.
Finance Minister Mantega has pledge major spending cuts in 2011 to meet the government's primary budget surplus target of 3.3 percent, following expansionary spending in the run-up to October's presidential election [[ID:nN24293981].
Brazil's government maintained a high level of spending before the election, helping to fuel inflationary pressure.
In the 12 months to October the primary budget surplus was 2.85 percent of GDP, up from around 2 percent during most of the year due to a one-off payment by state oil company Petrobras (PBR.N)(PETR4.SA).
Financial markets expect a 150 basis point increase of the benchmark Selic rate in coming months to bring down inflation.
But the government's budget target is at risk from legislators and labor unions wanting an increase in the minimum salary, public sector pay, and pension payments.
Rousseff won a clear majority in the Senate and the lower house Chamber of Deputies, making it easier to advance her agenda. But progress may depend on how well the inexperienced Rousseff can deal with often unruly allies, a challenge that stumped even the savvy Lula at times. Failure to rein in spending significantly could drive up interest rate futures and force a more aggressive monetary policy tightening cycle.
What to watch for:
-- Congressional approval of the 2011 budget in December.
-- Further details of planned expenditure cuts.
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