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Brazil stocks feel the effect of Dilma Rousseff’s re-election

Brazil stocks feel the effect of Dilma Rousseff’s re-election

Posted by Laura Zúñiga on October 27, 2014

A sharp drop in Brazil’s financial markets signalled investors are unsure whether the newly re-elected President Dilma Rousseff will take the necessary steps to reinvigorate the country’s stalled economy.

Bovespa fell 6 per cent in the opening minutes of trading and finished the day down about 2.8 per cent. Petrolio Brasileiro SA, the national energy firm, was the biggest loser, with shares down 12.3 per cent. The Brazilian real sank to its lowest value in nine years to 2.52 against the U.S. dollar.

On Ms. Rousseff’s watch, the Brazilian economy – the world’s seventh largest, long considered one of the most promising emerging markets – has run out of steam and contracted in the past two quarters.

While global factors, particularly China’s diminished appetite for commodities and food exports, have caused some of the problem, Ms. Rousseff’s administration is also widely criticized here for its statist approach to economic management. The government has maintained artificially low prices on fuel and other staples, a policy popular with its low-income base, and high spending rates that have eaten away the budget surplus.

Ms. Rousseff now faces a host of big challenges. There is a critical nationwide drought that threatens not just water supplies but also electricity generation, and she has a narrower mandate than any president since the end of the dictatorship. But the biggest by far is the state of the economy. She was unusually conciliatory (by her standards) in her victory speech on Sunday. But while Brazilians from across the political spectrum seem certain of what steps she should take to reignite growth and woo investors – far fewer seem certain she will take them.

“The biggest uncertainty is who will manage the Ministry of Finance for the next term: What we would like to see is someone who is more pro-market than what we have had so far,” said Walter Novaes, a professor of economics at the Pontifical Catholic University of Rio de Janeiro. “Next year will be hard – the fiscal balance is in bad shape and the government will not be able to do too much because expenses are already budgeted. So we need someone to inspire entrepreneurs and the business community to invest.”

Ms. Rousseff has said she will replace her current Finance Minister but refused, during the campaign, to say whom she would appoint, apparently out of a desire not to be seen to be pandering to the financial world. Her reticence contributed to the wild gyrations of the markets through the past few weeks. There is intense speculation about a short list of names here; the lead candidate is rumoured to be Nelson Barbosa, a former director in the Finance Ministry who quit over his disagreements with the Rousseff government.

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