If Brazilians find themselves in a tight spot, they say they are in a saia justa (a tight skirt); Brazil’s president has left herself little room for economic manoeuvre ahead of a difficult re-election campaign

Brazil’s president has left herself little room for economic manoeuvre ahead of a difficult re-election campaign

Feb 8th 2014 | From the print edition

IF BRAZILIANS find themselves in a tight spot, they say they are in a saia justa (a tight skirt). Although she usually prefers trouser suits, that is precisely where Dilma Rousseff finds herself. Later this month she will launch her campaign to win a second term in a presidential election due on October 5th. Normally at this stage of the political cycle, as in the run-up to elections in 2006 and 2010, the government would be ramping up spending. But when Ms Rousseff spoke to the World Economic Forum in Davos last month, with the São Paulo stockmarket and the real dipping along with other emerging economies, she felt impelled to stress her commitment to being strait-laced.

Brazil’s economy has disappointed since she took office in January 2011. Growth has averaged just 1.8% a year; inflation has been around 6%; and the current-account deficit has ballooned, to 3.7% of GDP. Her government has some good excuses. She inherited an overheating economy, the world has grown sluggishly, and cheap money in the United States and Europe prompted an exaggerated appreciation of the real.

But Ms Rousseff has scored some own goals as well. Her predecessor, Luiz Inácio Lula da Silva, left monetary policy to the Central Bank and mostly stuck to clear fiscal targets. By contrast, Ms Rousseff chivvied the bank into slashing interest rates; her officials tried to micromanage investment decisions with subsidies and to cover up the fiscal damage through accounting tricks. Rather than the promised recovery of growth, the result was that Brazilian businessmen and foreign investors lost confidence in the economic team—and just at the wrong time. When America’s Federal Reserve last year announced a possible “tapering” of its bond-buying, the real began to slide. Against the dollar, it is now 17% below its value in May.

A weaker currency is just what Brazil needs if it is to balance its external accounts and its manufacturers are to thrive. But it also risks adding to inflation, the upward creep of which was one factor (along with poor public services) in mass protests that shook Ms Rousseff’s government last year. This has prompted a change of mind. Alexandre Tombini, the Central Bank governor, has been allowed to raise interest rates (from 7.25% to 10.5%). At Davos, Ms Rousseff for the first time said that her aim was to bring inflation down to 4.5%; she previously seemed content merely for it to stay below the ceiling of the target range of 2.5-6.5%. Lula, her political mentor, “surely told Dilma that interest rates won’t lose her the election, but inflation might,” says a senior opposition economist.


The Workers’ Party, which has ruled Brazil since 2003, expects to fight and win the election on its record of job creation and of lifting 40m Brazilians out of poverty. Unemployment is low and real wages are still rising (see chart). This explains why Ms Rousseff remains the clear favourite for October. A Datafolha poll in late November gave her 47% of the vote, compared with 19% for Aécio Neves and 11% for Eduardo Campos, her main challengers.

Some market analysts include Brazil as one of five “fragile” emerging economies, but the government rightly counters that it does not belong in the same company as Argentina or Turkey. As Mr Tombini points out, Brazil has a strong banking system and the reserves ($376 billion) to smooth a gradual exchange-rate adjustment. While talking of fiscal responsibility, the signs are that the government thinks it can get away with postponing belt-tightening until after the election.

But what if a mixture of outside events and fiscal fudging at home (and even a possible downgrade by credit-rating agencies) prompts a bigger decline in the real? So far the pass-through of devaluation to domestic prices has been low, but the history of price-setting in Brazil suggests that this might suddenly change if the currency weakens further, says Monica Baumgarten de Bolle, an economist at Rio de Janeiro’s Catholic University. “This is what really worries the Central Bank,” she says. It would have to respond with a monetary squeeze, killing growth.

In the same Datafolha poll 66% of respondents said they want the next president to act differently from Ms Rousseff, a generic yearning for change that suggests her support may be less solid than it seems. By allowing inflation to become a campaign issue, she has strayed on to the opposition’s ground. Her past mistakes have led her to a situation in which her promise to spend more on public services is uncomfortably dependent on the humours of international investors. That is the tight skirt she has donned. The next few months will show whether she can wriggle out of it.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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