May 15, 2014 / 12:26 PM / 3 years ago

INSIGHT-Brazil's Rousseff sticks to her guns despite investor pressure

BRASILIA, May 15 (Reuters) - Dilma Rousseff sometimes enters the cabin of her presidential plane, asks to see the flight plan and orders the pilot to fly around potential turbulence - even if it might add hours to the journey.

Since taking office in 2011, Rousseff has often tried to control Brazil's economy in the same hands-on way.

That's not going to change if she's re-elected in October, officials close to her say. Despite a sharp slowdown in growth, she plans to mostly ignore pleas by investors to alter her interventionist style or embrace sweeping pro-business reforms.

While a few market-friendly changes are likely, Rousseff will stick with a leftist policy mix that gives her control over everything from taxes to some companies' profit margins in an effort to ensure a "fairer," more equitable economy.

Reuters spoke to five officials who are helping Rousseff set priorities for a second term. They spoke on condition of anonymity because Rousseff has prohibited them from discussing her plans until the campaign officially starts in July.

The officials said the likely changes include a new finance minister who has a better relationship with investors; a renewed attempt to simplify what the World Bank calls the world's most complex tax system; and an enhanced, active role for Rousseff's predecessor and political mentor, Luiz Inacio Lula da Silva, who could bring a more pragmatic voice to big decisions.

But those changes may not prove as dramatic as they seem, largely because of who will remain in the pilot's seat.

"Dilma is Dilma, and she's not going to change," said one senior official who has known her for years. "You'll see some (policy) modifications, but the essence will remain the same."

A status-quo approach would be a big letdown for Brazilian financial markets, which have rallied recently on speculation that Rousseff might make a more meaningful policy shift, or that one of her more centrist rivals might win the Oct. 5 election.

A lifelong government technocrat who studied post-graduate economics, Rousseff has been involved in every big economic decision of her presidency - and many small ones too, aides say.

Her government has alternately raised and lowered certain taxes, sent interest rates up and down and then back up again, tried to pressure private-sector banks into lending at lower rates, and forced state-run oil company Petroleo Brasileiro SA to keep fuel prices well below international levels.

Each of those policies has arguably caused as much harm as good, swelling Brazil's budget deficit and sending inflation higher, among other problems.

More broadly, many investors say that by micro-managing, Rousseff has squandered the reputation Brazil earned last decade as a stable, profitable emerging market.

While the business climate remains far better than in some other Latin American countries like Argentina or Venezuela, economic growth under Rousseff has slowed to just 2 percent a year - about half the average pace under Lula.

Inflation is running above 6 percent, and Brazil's stock market has sagged about 22 percent since she took office.

The strains aren't limited to Wall Street. Anger over rising prices and poor public services caused huge street protests last year, and many observers expect them to erupt again in June when the soccer World Cup focuses the global spotlight on Brazil.

Rousseff's office declined requests for an interview.

FOCUS ON POVERTY, UNEMPLOYMENT

The number of Brazilians who describe Rousseff's government as "good" or "great" in polls has fallen from 65 percent in March 2013 to 35 percent this month. Her lead over her election rivals has also shrunk.

That has increased calls, including from members of her own coalition, for Rousseff to adopt more business-friendly tactics.

Yet Rousseff measures success differently, and always has.

During her formative years as a leftist guerrilla in the 1960s, she opposed a military government that often boasted economic growth rates above 10 percent but also saw real wages decline for the working class, exacerbating one of the world's biggest gaps between rich and poor.

Since then, as a mid-level energy policy official after democracy returned in the 1980s and now as president, Rousseff has focused on job creation and wage growth as her main goals.

Seen through that lens, her first term has been positive.

Unemployment has fallen to record lows of around 5 percent, and stayed there. Under Lula and then Rousseff, more than 40 million people were pulled from poverty, making Brazil one of the few countries anywhere that has paired solid economic growth with falling inequality.

Rousseff has said she supports profitable businesses, but she must manage the economy to prevent excesses inherent to the private sector. She has also continued to stimulate domestic demand while rejecting calls for austerity or changes to Brazil's generous labor laws, pointing to Southern Europe's high unemployment as a kind of alternate reality.

"There are people saying we need unpopular measures," Rousseff said on May 7, in an allusion to budget cuts. "But you have to be careful. An unpopular measure can turn into a measure that hurts people."

Those close to Rousseff say her interventionist style is as much a matter of personality as governing philosophy.

Having never sought elected office until Lula chose her as his preferred successor in 2010, Rousseff lacks the charisma or deal-making ability often prized in Brasilia. She feels more comfortable within the sterile world of Power Point presentations and policy papers, and thus her decisions sometimes feel more authoritarian than she intends, they say.

Indeed, some in her inner circle have taken to joking about her obsession with detail.

During a recent internal presentation on health care, officials set up a live video feed of a working clinic. Rousseff noticed that one of the patients had been waiting for too long, and stopped the meeting.

"Call them and find out why that woman is waiting!" she ordered, according to an official present. Everyone in the room then watched on TV as a surprised worker picked up the phone and began to profusely apologize.

"They're going to think you're always watching now, President," Brazil's then-health minister, Alexandre Padilha said, laughing. Rousseff nodded with apparent satisfaction.

CALL FOR REFORMS

Many observers say that Rousseff's top-down, incremental style has already reached its limit.

Without a major overhaul of the budget, a sweeping tax reform and other structural reforms, Brazil will likely remain stuck in a pattern of roughly 2 percent growth and high inflation, said Alberto Ramos, Latin America economist for Goldman Sachs.

Rousseff's efforts to push down interest rates and otherwise stimulate consumption "have backfired spectacularly," Ramos said. "I suppose it's in their DNA - they just don't believe in adjustment policies."

Rousseff's advisers say it's not quite that simple. They say a substantial budget cut is probably unavoidable as her second term starts in early 2015, while other imbalances - such as artificially low fuel prices - must also be addressed, but with the pain spread out over time.

Others argue that Rousseff has already tacked toward a more centrist approach. They say that last June's protests convinced her of the need to make rapid improvements to public services and infrastructure, which would only be possible by pleasing the business community.

Since then, she has accepted higher profit margins for companies that build highways, for example.

"The second term already began last August," one aide said.

Some are pushing for even more. Alessandro Teixeira, a former number-two official at the trade ministry who Rousseff named to write her campaign platform, has been telling business leaders that they would have more input in a second term.

Teixeira has also said Rousseff would seek to make a series of piecemeal changes to simplify the tax code, sources say.

But the last two presidents have failed to convince legislators to make significant tax changes, and Rousseff's relationship with Congress is unusually poor.

Meanwhile, promises of a rapprochement with business leaders have been partly drowned out by Rousseff's recent actions, which included plans for yet another targeted tax increase - this time on beverages - and a 10 percent rise in social welfare payments that her critics described as a populist election-year move.

"If she wins, I don't think any of us can expect much change," said Ricardo Figuereido, who runs a small sheet metal company in eastern Sao Paulo. He said he voted for Rousseff in 2010, but is considering voting for someone else in October.

"Sales haven't been bad, but they haven't been good," he said. "I don't know if I want this for another four years." (Reporting by Brian Winter; Editing by Kieran Murray)

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