| BRASILIA, July 1
BRASILIA, July 1 Brazil's presidential election
in October looks less risky to investors than any other in the
last 25 years in the South American powerhouse as its economy
bounces back from a brief recession, but there are still
investment risks to watch this year.
President Luiz Inacio Lula da Silva's former chief of
staff, Dilma Rousseff, is the ruling Workers' Party candidate
to succeed him. Polls show she has now overtaken her main
rival, Jose Serra, the former Sao Paulo state governor running
for the centrist opposition PSDB party. [ID:nN29178728]
Most analysts see Rousseff as the favorite because she can
count on support from the hugely popular Lula and will be
helped by the rebounding economy. [ID:nN24264257]
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: a free-floating currency, inflation control and fiscal
discipline. Some investors prefer Serra for his party's
centrist stance and his managerial experience.
In an effort to win over centrist voters and avoid
unsettling investors, Rousseff has emphasized market-friendly
proposals so far in the campaign.
Serra, who believes the government should be active in
economic affairs, has yet to spell out many specific policy
proposals. However, he recently called for lower interest rates
and urged an overhaul of Brazil's costly pension system.
Rousseff, who was endorsed by the center-left Workers'
Party in February, 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.
Serra wants the central bank to look at the broader economy
and not just inflation when setting interest rates. He says the
central bank should have cut interest rates more aggressively
during the 2008 global financial crisis.
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 not provided many
details. Serra wants to reform the pension system by cutting
benefits for some civil servants, while Rousseff favors a
piecemeal reform that would raise more money to finance the
growing pension deficit and alter some retirement rules.
Neither proposes nationalizing private companies. But
Rousseff, and to a lesser extent Serra, favor a strong role for
state firms in the economy, a position that gained ground after
low-cost loans by state banks helped Brazil's economy recover
from the global crisis. Larger state companies 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 revive state-owned telephone company
Telebras (TELB4.SA) to expand broadband Internet access have
sent its shares sharply higher, but further moves to strengthen
Telebras could depress shares of private telecoms. 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 and has said he would cap
current expenditures, potentially paving the way for swifter
interest rate and tax cuts. [ID:nN25443706] [ID:nN26210019]
Both Serra and Rousseff were officially nominated by their
parties in in June. [ID:nN12147535 ] [ID:nN13136489]
A crisis over Serra's choice of running mate exposed
divisions among his coalition. Serra tapped 39-year-old Indio
da Costa, a lawyer from the small DEM party, scrapping a
previous proposal to run with a senator from his own party
after DEM leaders threatened to quit the coalition.
What to watch:
-- Serra and Rousseff will name their economic advisers in
coming weeks. A left-wing choice could unnerve investors and
send jitters through financial markets.
-- Details of Serra's economic proposals, particularly
fiscal and monetary policy.
The government is expected to maintain a high level of
spending before the election, putting pressure on the central
bank to raise interest rates to curb inflation.
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 inflation
remains on track to exceed the center of the government's
What to watch:
-- Weak monthly primary surplus figures would indicate
worsening fiscal discipline and could push up interest rate
-- Lula and Mantega could put increasing pressure on
central bank chief Henrique Meirelles to keep expected interest
rate hikes to a minimum so as not to jeopardize the economic
recovery in an election year.
OIL AND GAS
Congress is expected to approve by the end of the year
government-proposed legislation that would increase state
control over some of the world's biggest recent oil finds. The
overhaul seeks to ensure proceeds from vast new fields flow to
the state to help bankroll investments in areas like
infrastructure, education and poverty-reduction programs.
The measures will likely reduce competition in the sector
while boosting the role of state energy giant Petrobras
(PETR4.SA)(PBR.N), 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.
Brazil's Chamber of Deputies and the Senate have approved
the key points of the legislative proposal. Analysts give the
proposal about a 60 percent chance of approval this year.
Plans to create a production-sharing model for future oil
projects to replace the current concession system have been
approved by the Senate but returned to the lower house for
conciliation after amendments were made.
What to watch:
-- Disagreement in the Senate over how to distribute oil
revenue between the federal government and states could hold up
parts of the proposal, along with election campaigning and the
distraction of the World Cup. [ID:nN26161706]
Nearly a dozen cabinet members resigned in April to
campaign for public office in the Oct. 3 election. Most have
been replaced by career civil servants who typically lack the
political capital to push the government's agenda.
What to watch:
-- If Lula's successor fails to win a clear majority in
Congress, reforms needed to improve Brazil's long-term
competitiveness may face difficulty getting approval. These
include reforms to an unwieldy tax system, costly pension
benefits and rigid labor laws.
-- Strong pledges from Serra or Rousseff to cut spending
and boost efficiency could help reduce inflation expectations.
Mud-slinging and corruption scandals tend to surface during
Brazilian election campaigns. They could paralyze Congress and
harm the camp of either of the leading candidates. Lula himself
came close to facing impeachment proceedings in 2005 when his
party was involved in an illegal campaign-financing scandal.
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. Some analysts think
Serra could also 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.
(Additional reporting by Peter Murphy; editing by Kieran
Murray and Anthony Boadle)