reuters/Rousseff’s election strategy digs deeper hole for Brazil economy

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SHAFAQNA (International Shia News Association)-President Dilma Rousseff’s strategy of slamming bankers and playing up class divisions may give her the edge in this month’s election but it further strains relations with business leaders just as Brazil’s stagnant economy badly needs fresh investment.

The leftist incumbent, who led the first round of voting on Sunday and now faces market favorite Aecio Neves in an Oct. 26 runoff, is using heavy government spending and some tough rhetoric to shore up her support among Brazil’s poor.

The ruling Workers’ Party has used a similar approach to win the last three presidential elections in a country with a vast wealth gap, and Rousseff is doubling down on it in Brazil’s closest and most volatile campaign in decades.

She is focusing on her party’s impressive record of reducing poverty during its 12 years in power while portraying Neves’ Brazilian Socialist Democracy Party (PSDB), which led the country in 1995 to 2002, as beholden to the wealthy.

“We’re going to have another dispute with the PSDB, which governed for a third of the population and forgot the neediest,” Rousseff said on Sunday night after Neves had a last-minute surge in support to grab second place and a runoff spot.

She hammered on the same theme on Monday, lambasting the PSDB as the party of the rich and dismissing a market rally following Neves’ strong showing as irrelevant.

“Investors can do all they want, but they don’t win elections,” Rousseff said. “The people win elections.”

Last month, her team ran a TV ad criticizing the proposals of another market-friendly rival by showing bankers in suits sitting around a table and laughing as food disappeared from the plates of a poor family.

Rousseff’s advisers believe the campaign does no lasting damage because investors understand that attacks on bankers are part of the election process since the global financial crisis, even in the United States and other rich countries.

“I think the rhetoric that we see against the private sector will fizzle very quickly if she wins,” said Carlos Thadeu de Freitas, chief economist with Brazil’s National Confederation of Commerce and a former central bank director.

Yet others say the Workers’ Party approach is more dangerous than in the last three elections, because of the particular problems facing Latin America’s largest economy.

Last decade, Brazil grew nearly 4 percent a year thanks to hefty demand for commodities from China and a big rise in consumer credit and spending. But growth has slowed to below 2 percent a year under Rousseff due to infrastructure bottlenecks and other supply-side problems that only investment can fix.

Rousseff already had a poor reputation among investors who distrust her penchant for state intervention in the economy.

Several senior executives told Reuters that Rousseff’s campaign rhetoric may prevent her from repeating efforts, seen during her first term, to reach out to leaders in industry and finance, a “charm offensive” aimed at winning their confidence.

“If she thinks we’re marching up to Brasilia again next year, she can forget it,” a leading financial executive in Sao Paulo said on condition of anonymity.

FISCAL SLIPPAGE

Most investors and business leaders in Brazil want a change in government, largely because of the weaker economic growth and public finances.

The government all but abandoned its 2014 budget savings target as it ramped up spending on social programs and pork-barrel projects in what critics say was an election-year effort to shore up support among the poor and its coalition partners in Congress.

Former President Luiz Inacio Lula da Silva used a similar strategy in 2010 to help ensure that Rousseff, his chosen successor, won the election.

In polls taken before the first round of voting on Sunday, Rousseff led Neves by about 6 percentage points in the event of a runoff. That was due to a 22-point lead among voters in households earning less than about $700 a month – who account for about 40 percent of the electorate. Neves led among all other income groups.

The short-term benefits to heavy spending are obvious but it could create a major budget headache for Rousseff – or Neves, if he pulls off an upset.

“The deterioration of the country’s finances is such that whoever wins the presidency will have very little room to maneuver next year,” Marcos Mendes, a fiscal consultant with the Senate and former treasury official between 1989 and 1992.

In 2010, the economy grew 7.5 percent, helped by a commodities-fueled boom. Lula had built up a good reputation on Wall Street, and most investors were willing to look past the divisive rhetoric and missed budget goal in his final year.

Today, Brazil’s investment rate has fallen to just 16.5 percent of gross domestic product. That is well below the 20 percent-plus rates seen in other Latin American countries like Colombia and Peru, where economic growth has been much faster.

Investors have two major misgivings about Rousseff: that she has turned her back on fiscal rigor, and that she distrusts the private sector even if she isn’t as hostile to it as governments in neighboring Venezuela or Argentina.

Rousseff’s defenders say she has had to deal with a tough global economy that has also affected other emerging markets, and that the fiscal problems are partly the result of tax cuts that business leaders themselves asked for.

Through August, the government met only a tenth of its 2014 primary budget surplus target of 99 billion reais, or about 1.9 percent of GDP. That makes it almost impossible to meet a goal that it had already lowered from 3.1 percent of GDP at the start of the year.

A primary surplus is the government’s balance of revenues and spending, minus debt interest payments.

The weaker fiscal position led Standard & Poor’s to cut its sovereign debt rating closer to speculative territory in March, and Moody’s Investors Service is threatening to do the same.

Rousseff has suggested that she would address the concerns of ratings agencies and others by making some spending cuts in early 2015, though they would be limited and gradual.

Anything more would be politically difficult since Rousseff has accused Neves of planning a “big squeeze” on spending if he is elected, a line of attack her advisers say will become even more pronounced before the runoff.

In an olive branch to the private sector, Rousseff recently said she would replace Finance Minister Guido Mantega in a second term, although his departure was already expected and the president makes many of the key financial decisions herself.

Charles Lieberman, founder of Advisors Capital Management, an investment fund with $1 billion in stocks and other assets under management, said he sold all shares in state-run oil giant Petroleo Brasileiro SA early in Rousseff’s term because of her meddling in the company and the economy at large.

Her behavior in this election campaign has been “worrying,” he said. “To me, it all just says ‘Stay away.'”

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