| RIO DE JANEIRO, April 22
RIO DE JANEIRO, April 22 Brazil's financial
markets have soared over the past month on hopes that the
government may run smaller deficits, stop interfering as much in
the private sector and perhaps even undertake long-needed
reforms to revive the economy.
But some of the most experienced Brazil-watchers on Wall
Street are saying: Not so fast, guys.
While the business climate is likely to improve somewhat in
the next few years, hopes for a truly dramatic changes such as
an overhaul of the public pension system are probably overdone,
The markets' optimism has centered around an October
presidential election in which left-leaning President Dilma
Rousseff, who seeks a second term, has been losing popularity
Rousseff has been unpopular with financial markets because
of her heavy hand in the economy. She has alternately cut and
raised taxes in various sectors and held down fuel prices at
state-run oil company Petroleo Brasileiro SA, among
Rousseff's two main presidential election rivals are more
market-friendly so an opposition win would be welcomed by
Even if Rousseff wins, as she is still expected to do, many
investors believe she has been chastened by her falling approval
ratings and economic growth averaging just 2 percent a year
during her first term, and that could lead her to be less
activist in a second term.
A new-look Rousseff would please financial markets if she is
"very decisive in the first three months of her new
administration to tackle the (macroeconomic) problem," said
Paulo Vieira da Cunha, head of research at ICE Canyon, a fund
manager with $4 billion in assets.
That would probably involve stricter control of government
spending and a clear move away from the accounting tricks that
Rousseff's government used to meet deficit targets in recent
years, most analysts say.
That would allow the economy to move closer to its long-term
growth rate of around 3 percent a year, Vieira da Cunha, who was
deputy governor of Brazil's central bank between 2006 and 2008,
told Reuters in an interview in New York.
"Once you regain a platform of macro stability," he said,
"you can start thinking: what can I do to make things grow above
That's where things get complicated.
Relaxing labor laws, attacking pension deficits and
overhauling one of the world's most complex tax codes are
crucial for Brazil to lay the ground for sustained growth rates
of above 4 percent a year, they say.
But those items have been on Wall Street's wish list for a
decade or more, with no luck.
While China, Mexico and some other emerging markets have
embraced tough reforms to boost long-term growth, Brazil moves
"The same issues around the reform agenda that I've heard
when I started covering Brazil (in 1999) are still there," said
Lisa Schineller, director of sovereign ratings at Standard &
LITTLE CONFIDENCE, LOW GROWTH
Before Rousseff took office in 2011, she told Reuters in an
interview that she believed Brazil's economy could continue to
post strong growth without major tax or fiscal reforms.
She is still unconvinced such big changes are necessary or
politically feasible, officials close to her say.
Even if one of her more market-friendly rivals wins, he
would likely have to deal with the same deadlocked, hostile
Congress that has stymied Rousseff.
Many legislators point to last decade's robust growth as
proof that Brazil's economy does not need major changes. They
believe the recent slowdown is more the result of international
issues, like China's slowdown and debt problems in Europe.
As a result, most of the reforms championed by investors are
barely in the discussion phase.
"You have to debate those reforms for three years and the
discussion is not there," said Sebastian Briozzo, another
director of sovereign ratings at S&P.
Lack of progress on reforms was at the root of S&P's
decision to downgrade Brazil's ratings to near junk level last
month. Prospects for meaningful reforms in the next few years
are also slim, according to the ratings firm.
The stagnation has led to falling corporate confidence and
lower investment throughout Rousseff's term. But sentiment may
have recently bottomed out, said Ben Rozin, senior analyst and
portfolio manager with Manning & Napier, a Rochester, New
York-based fund manager with $48 billion in assets.
Brazil's stocks tumbled 15 percent last year - the worst
performance among the world's 50 largest equity markets.
Like many Wall Street investors, Manning & Nappier sharply
reduced its holdings of Brazilian shares during the first years
of Rousseff's administration.
Since then, it has been wading back into the Brazilian
market as stock prices looked attractive.
Meanwhile, recent polls showed Brazilians, worried about a
pick up in inflation, are growing less supportive of Rousseff's
economic policies. Bets on some kind of positive political
change contributed to a nearly 16 percent jump in the benchmark
Bovespa index since March 14.
Rousseff still remains a favorite to win the election. Many
investors say they have a model for what the rest of her
presidency could look like - her predecessor, Luiz Inacio Lula
da Silva, who was from the same leftist party but was perceived
as a significantly steadier hand.
"We're hopeful that, even if there is no change in
leadership, perhaps the second administration of Dilma will be
closer to what Lula had: with less intervention and more
business-friendly policies that benefit everyone," said Rozin.
(Editing by Brian Winter and Kieran Murray)