BRASILIA Aug 2 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. She is tied in some polls, and in others is
ahead of her main rival, Jose Serra, the former Sao Paulo state
governor running for the centrist opposition PSDB party.
Most analysts say Rousseff has better chances to win as 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 business leaders prefer Serra for his support
of national industry and his managerial experience. But concern
is growing in financial markets over his heavy-handed approach
to economic policy [ID:nN29257620].
In an effort to win over centrist voters and avoid
unsettling investors, Rousseff has emphasized market-friendly
proposals so far in the campaign. She is also being advised by
market-friendly former finance minister Antonio Palocci.
Serra, who believes the government should be active in
economic affairs, has yet to spell out many specific policy
proposals. However, he has called for lower interest rates and
said the currency was overvalued and that the central bank
needed to follow the government's economic policy.
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.
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.
Uncertainty over government plans to use state-owned
telephone company Telebras (TELB4.SA) to expand broadband
Internet access has sent its shares lower after an initial
rally. The plans could also affect share performance of private
telecoms depending on their participation in deals.
Lula also wants to strengthen state-owned power company
Eletrobras (ELET6.SA), though the intent may be to expand
Serra is widely believed to be the tougher of the two main
candidates on fiscal discipline [ID:nN25443706]
[ID:nN26210019], though he has failed to match the detailed
primary surplus targets Rousseff has given.
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:
-- Details of Serra's economic proposals, particularly
fiscal and monetary policy.
-- New names surfacing during the campaign as potential
The government is maintaining a high level of spending
before the election, potentially fueling inflation and forcing
the incoming president to adopt austerity measures.
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 in the 12
months to June it was only 2.07 percent.
What to watch:
-- Continued weak monthly primary surplus figures would
indicate worsening fiscal discipline and could push up interest
rate futures. <0#DIJ:>
-- Mantega and Lula could step up pressure on central bank
chief Henrique Meirelles to keep the next interest rate hike to
a minimum so as not to jeopardize the economic recovery in an
OIL AND GAS
Brazil's Senate has postponed voting on key oil-related
legislation until after the election. That raises the risk that
the government-proposed overhaul be shelved in the case of a
victory for Serra, whose party has criticized the bills.
The proposal aims to increase state control over some of
the world's biggest recent oil finds and ensure their proceeds
flow to the state to help bankroll investments in areas like
infrastructure, education and poverty-reduction programs.
If approved, the measures will likely reduce competition in
the sector while boosting the role of state energy giant
Petrobras, offering fewer but still attractive opportunities
for foreign investors. [ID:nN01485799]
Of the four bills, only one enabling a massive
capitalization plan for Petrobras (PETR4.SA)(PETR3.SA)(PBR.N)
has passed into law.
But investor uncertainty over a possible Serra win could
force Petrobras to delay the capitalization plan.
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.
What to watch:
-- Disagreement in the Senate over how to distribute oil
revenue between the federal government and states could close
an already small window of opportunity in November or December
to approve the bill before Lula leaves office. [ID:nN26161706]
If Serra were to win the October election, the Lula
administration could lose its majority in Congress as "swing"
legislators migrate to the president-elect's camp. This could
create a hung parliament with little chance of approving major
bills before Lula leaves office on January 1.
Similarly, 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.
Mud-slinging and corruption scandals tend to surface during
Brazilian election campaigns and have the potential to paralyze
Congress and harm 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. He has also
criticized Venezuela for allegedly harboring Colombian rebels.
Some analysts think Serra could take a harder line in trade
disputes with Argentina and the South American trade block
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.
(Editing by Kieran Murray)