Brazil reforms unlikely…whoever wins election

What is behind Rousseff's turnaround in the polls?

Brazilian markets have tottered in the run-up to Sunday's presidential election, but analysts told CNBC that much-needed structural reforms were unlikely irrespective of the result.

Leftist incumbent Dilma Rousseff has pulled ahead in the polls over recent weeks, hitting market hopes for a win by opposition candidate Marina Silva. She is perceived as being more pro-business and was previously in the lead, but now Rousseff and her Workers' party (PT) are expected to gain a second term in power.

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If one candidate fails to receive more than 50 percent of the vote, a second round of elections will be held on October 26.

The turnaround in Rousseff and Silva's fortunes has caused Brazil's real and its benchmark stock index to sell off over the last few weeks. The U.S. dollar hit a six-year high against the real this week, and on Friday the greenback was trading at 2.502 real. Over the past week, the Bovespa index has tumbled around 6.6 percent, after a sharp rise in the second half of August.

Yasuyoshi Chiba | AFP | Getty Images

The volatility reflects concern about Rousseff's ability to reignite Brazil's economy if she gains another term. During her four years at the helm so far, growth has fallen sharply, down from a high of 7.5 percent in 2010 to 2.5 percent last year. The economy contracted in both the first and second quarter of 2014.

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Investors have criticized Rousseff's fiscal stimulus measures—which include tax cuts for selected industries—as interventionist and populist. She has also failed to implement reforms viewed by many as necessary, such as a reduction in public sector wages and pensions.

"Tax reforms are absolutely key in my view… but there is an enormous amount of vested interest and inertia over reforms," Alistair Newton, senior political analyst at Nomura, told CNBC on Friday.

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But even Silva and her Brazilian Socialist Party would struggle to implement changes even if they won Sunday's election, Newton and other experts said, despite unexpectedly positive rhetoric on reforms of late.

"We are very cautious about reform overall," Steve Cohen, investment strategist at BlackRock, told CNBC on Friday.

Nicholas Spiro of Spiro Sovereign Strategy agreed that Silva would struggle to instigate fiscal tightening and labor reforms, even assuming her reformist zeal held after the election.

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"It's one thing for Ms Silva to ride a wave of anti-incumbent sentiment in Brazil. It's quite another thing for her to implement the ambitious fiscal, structural and institutional reforms she now champions," Spiro in a research note last week.

"Quite aside from doubts about Ms Silva's credibility as a reformer, her biggest challenge as president would be to overcome her alliance's weak position in Brazil's Congress."