Brazil's election celebration could be short-lived

Brazil's big move
Brazil's big move   

Brazil's election Sunday is widely seen as a big win by workers over investors.

But the victory celebration may be short-lived.

After a bitter race that was decided by a thin margin, leftist President Dilma Rousseff kept her job for another four years thanks to the support of an emerging middle class whose lives have been improved by a generous government anti-poverty program.

Brazil's president and Workers' Party (PT) presidential candidate Dilma Rousseff reacts during news conference after the disclosure of the election results in Brasilia Oct. 26, 2014.
Ueslei Marcelino | Reuters
Brazil's president and Workers' Party (PT) presidential candidate Dilma Rousseff reacts during news conference after the disclosure of the election results in Brasilia Oct. 26, 2014.

Now, however, with a commodity-driven boom winding down along with the global economy, the candidate widely known as just "Dilma" faces big challenges paying for social services as the growth that paid for it stalls out.

Most investors are skeptical that she can pull it off. Stocks in Brazil sold off more than 4 percent when the markets opened Monday, which was less than some market forecasters predicted. But Brazil's Sao Paulo exchange index has plunged 20 percent since September. The Brazilian real, already down more than a third from its 2001 peak, fell as much as 3 percent against the dollar on Monday to a six-year low.

Those numbers speak to the widespread dissatisfaction of investors and business owners, who say Brazil needs to implement widespread reforms in order to revive economic growth.

"She's been elected by her core Workers' Party vote," said James Lockhart-Smith, associate director for Latin America at Maplecroft, a U.K.-based global risk forecaster. "You may see come cosmetic changes, but basically it's going to be business as usual—unfortunately for investors.

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The Workers' Party voters who returned Dilma to office Sunday include millions of people whose lives have been improved by government policies that helped spread the wealth generated by a once-rapid pace of growth

"But if you talk to the people in the streets—the poor, the new emerging middle class—they are still relatively happy with all the social achievement Brazil has managed to implement over the last 10 years," said Carlos Caicedo, an analyst at IHS Country Risk.

Roughly 40 percent of Brazil's 200 million people live in households earning less than $700 a month, according to Reuters. But the government's expansion of welfare spending has helped lift more than 40 million people out of poverty, the news service said.

That achievement is now at risk in Brazil, as well as in other emerging-market nations that are feeling the end of the global commodities boom.

The good times also have left Brazil with a debt hangover, the result of a private borrowing binge over the past decade. As credit now tightens, the economy faces yet another headwind.

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"The real concern is that, faced with a struggling economy, the authorities lean on banks to raise lending further," said Neil Shearing, emerging markets economist at Capital Economics. Such a move would increase the risk of a much harder economic landing at some point during Dilma's second term.

After growing by as much as 7.5 percent the year before she took office, Brazil's economy is on track to expand by less than 1 percent this year. Tax breaks and other policies designed to spur growth have had little effect.

Big spending on social programs also has sparked higher inflation and left the government with widening budget deficits, bringing louder calls for reforms.

Rousseff election win 'bad news' for markets: Pro
Rousseff election win 'bad news' for markets: Pro   

Dilma's supporters have shrugged off dire warnings from investors as political hype from speculators. At a victory party late Sunday, her foreign policy advisor Marco Aurelio Garcia told reporters that investors should relax and "take tranquilizers."

Political speculation now centers on possible changes to Dilma's Cabinet. She has promised to replace her finance minister as part of an overhaul of her economic policies.

"She needs to find a very credible person to run the Finance Ministry," said Caicedo. "If she does that and appoints someone who is close to the business sector, it will buy her some time. "

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But as the global economy continues to slow, time may not be on Dilma's side.

Analysts such as Shearing believe Brazil must move from a growth model based on consumption to heavier reliance on investment. That means shifting economic support away from the working class that returned her to office, and toward the business sector that largely opposed her re-election

"This in turn will require her to take on vested interests within her political base," he said. "All of this seems a tall order."