Prospect of Rousseff re-election spooks Brazil markets

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Brazilian markets are reeling at the prospect of a second term for President Dilma Rousseff, and experts say the selloff may not end anytime soon.

The Brazilian real dropped to six-year lows against the U.S. dollar this week, while the benchmark Bovespa index has tumbled over 5 percent since Monday.

"It won't be surprising to see more market weakness going into Sunday's polls. Rousseff must re-establish her credentials and prove that she's willing to make the necessary reforms" to support economic growth, said Vishnu Varathan, senior economist at Mizuho Bank.

"She's aware of the loss of confidence and comparisons to former leader Lula da Silva, who markets disliked," he said.

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Latest polls

Two polls released on Tuesday showed Rousseff beating Brazilian Socialist Party (PSB) candidate Marina Silva ahead of Sunday's vote.

Rousseff garnered 39 percent of support in first-round voting, according to an Institute of Public Opinion and Statistics (IBOPE) poll, and 40 percent in a poll by Datafolha. Silva had 25 percent in both polls.

If one candidate does not obtain a clear majority this weekend, a runoff vote will take place on October 26.

In a simulation runoff vote by IBOPE, Rousseff led Silva 42 percent to 38 percent, while Datafolha showed Rousseff leading 49 percent to 41 percent.

BlackRock likes Brazil
BlackRock likes Brazil   

Investors boo Rousseff

Investors are disillusioned with Rousseff and her leftist workers Party due to their inability to keep growth in positive territory, experts say.

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South America's largest economy contracted 0.6 percent in the April-June period, the second consecutive quarterly contraction.

"Rousseff is also known for her counter-productive interventionist policies," Varathan said "Sub-optimal transfers from electricity and oil subsidies have led to the economy stalling."

Her tendency to favor one-time stimulus measures over structural reforms and interference in state-owned firms, most noticeably oil producer Petrobras, are also major complaints.

State-run firms bore the brunt of the Bovespa's losses on Tuesday. Banco do Brasil sank over 7 percent, while Eletrobras dropped over 4 percent.

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Brazil: Investment opportunities and challenges
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Cheer for Silva

Silva was appointed as the PSB's presidential candidate in August after the death of party leader Eduardo Campos. She is known for market-friendly policies, such as credible inflation targets, central bank independence, and a floating exchange rate.

A Silva administration could improve confidence indicators and take 2015 gross domestic product (GDP) growth to 1 percent, Citi economists said in a note last week. The Brazilian central bank expects the economy to grow 0.7 percent in 2014.

Silva's platform also promises a better business environment, Citi added.

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"Silva pleads to simplify the tax code (by reducing the number of taxes) without increasing the tax burden, lower investment taxation, diminish the amount of regulation rules, strengthen and empower regulation agencies," the note said.