Uncertainty in Brazil’s Presidential Elections

By Luis Ferreira Alvarez

Brazil seems to be following President Dilma Rousseff’s ambitious agenda quite well. The country successfully hosted the 2014 World Cup, securing itself as a major political player, and recently created a new development bank with its BRICS counterparts, paving the way for greater economic influence. Now, Rousseff is moving towards the next point on her agenda: winning October’s presidential election.

On October 5th, Brazilians will go to the polls to elect a new president. While President Rousseff is highly favored to win re-election, an economic recession as well as further corruption cases in Petrobras, the country’s multinational oil and gas company, could harm her chances. To show her determination to Brazilians and to win re-election, Rousseff needs to revive the Brazilian economy and reduce government corruption before October.

A poll by Datafolha published on Thursday, July 17 shows that for the first round of voting, Rousseff has 36% of the vote, followed by Senator Neves of the Social Democracy Party (PSDB) at 20%, and Governor Campos of the Socialist Party (PSB) at 8%. While the poll is consistent with the past year (which showed Rousseff at 47% in February), the decrease in support is concerning for the president.

In fact, the president’s approval is dropping to the point where she tied with Neves in Datapoll’s second round of polls between the two top candidates. A recent poll comparing Rousseff to her main challenger Neves revealed a technical tie of 40% to 40% between the two candidates. This is bad news for the president. Earlier that month, a similar poll on a runoff between Rousseff and Neves had shown 46% favoring Rousseff and 39% favoring Neves. Since then, it appears Rousseff’s upper hand has slipped.

This change is not so much reflective on increased support for Neves, but rather of decreasing support for Rousseff. In fact, the number of people supporting him has not changed since early July.

As with most presidential elections, the state of the economy is a huge indicator of how happy a population is with the incumbent candidate. Of all respondents in Brazil, 58% expect inflation to rise. This has frustrated voters who despite still supporting Rousseff’s re-election compare her presidency to Lula’s, who oversaw growth in employment and the economy. Rousseff has downplayed the threat inflation poses, but this political tactics is unlikely to convince voters as purchasing power decreases and the economy continues to stagnate. If inflation is not tackled before October, it would provide Neves with another target against Rousseff.

The consumer price index, used to measured inflation, reached 6.5% in June, above the 4.5% benchmark set by the Central Bank. Similarly, 42% of Brazilians also expect an increase in unemployment, while 36% see the economy to muddle through, while 32% expect it to worsen.

The Central Bank has already reduced its 2014 growth forecast to 1.2%, and 1.7% for 2015. These are daunting numbers for an emerging power as these growth rates closely resemble more the Eurozone (which the IMF forecasts to grow by 1% this year and 1.5% for 2015). To jumpstart its economy, Rousseff would need to reduce the state’s intervention, provide incentives for investment, and diversify its trade with the rest of the world. One way to revitalize the Brazilian economy could be by expanding trade with the United States, with whom trade is highly diversified. Rouseff could also expand trade with other partners such as China and the EU.

To accomplish these tasks, however, could mean a decrease in government expenditure in popular programs. Decreasing support for public programs would undoubtedly come at a cost to Rousseff’s support. These policies have become the cornerstone of the Workers’ Party’s platform and any reduction could lead to further disappointment with Rousseff’s government. On the other hand, as the July poll shows, the president needs to gain the vote from non-PT voters, meaning that economic reforms need to take place before October to demonstrate that she is serious about restarting Brazil’s economy even if it means cutting popular social programs. Rousseff must weigh these options and determine which economic move is the most strategic.

Meanwhile, Brazil’s oil giant Petrobras is tangled in scandal as corruption allegations grow. On Thursday, July 17th, prosecutors charged Jorge Luiz Zelada, Petrobras’ former CEO, with fraud. Similarly, the National Congress is investigating these allegations, with members of Rousseff’s coalition siding with the PSDB opposition in creating an investigation committee. The corruption accusation could undermine Rousseff as a presidential candidate, as one of the cases occurred while Rousseff chaired Petrobras’ Board of Director. The resulting break in ranks within Rousseff’s Congressional coalition this past March reveals a discontent with the political status quo.

Finally, the government’s tight control over gas prices has cost Petrobras over $30 billion in the past three years, a financial leakage that has increased the company’s debt. However, with the upcoming elections and the 2016 Olympics just around the corner, the government is unlikely to raise gas prices. In order to fix this issue, gas prices should incrementally increase to alleviate the financial pressure on Petrobras. Rousseff should also help the ethanol industry by ending the gasoline subsidies, which would make ethanol more competitive, providing her with the additional narrative that her government is fighting climate change.

The president needs to tackle these corruption and economic issues before October by collaborating with the congressional committees and prosecutors. Similarly, Brazilians will go to the poll faced with the question, how do we best solve these challenges?

Although a single election will not solve all of the country’s problems, the confidence a new administration receives on its first few months provides an opportunity to push through policies that could alleviate the aforementioned issues. Indeed, many see these changes taking place after the election. However, if President Rousseff starts confronting these issues, it would signal to Brazilians she’s determined to tackle the hard choices, as well as create confidence in the markets that Brazil is a safe destination for investment.

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Luis Ferreira Alvarez is an Energy Analyst & Latin America specialist.

[Photo Courtesy of wikipedia, wikipedia, and wikipedia]

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