Rousseff May Take ‘Unexpected’ Brazil Budget Cuts, Says Nomura

Former Brazilian Economy Minister Antonio Palocci
Former Brazilian Economy Minister Antonio Palocci. Photographer: Evaristo Sa/AFP/Getty Images

Dilma Rousseff may take “bold and unexpected policy actions,” including budget cuts to allow for lower interest rates, if she holds onto a “commanding” lead and is elected Brazil’s president, according to a Nomura Securities International Inc. report.

Rousseff, the chosen successor of President Luiz Inacio Lula da Silva, could be considering additional taxes on capital inflows to stem gains in the real, said Tony Volpon, head of emerging-market research for the Americas at Nomura in New York.

“The policy mix of tighter fiscal and looser monetary policy would go a long way in alleviating part of the upward pressures” on the real, Volpon wrote in the report, entitled “Dilma’s First 100 Days.”

Brazil’s real, whose 33 percent gain against the U.S. dollar last year was the best performance among 25 emerging market currencies tracked by Bloomberg, has fallen 1.4 percent this year as of 1:05 p.m. New York time.

A smaller fiscal deficit will allow the central bank to cut its benchmark interest rate to 10 percent in 2011, from 10.75 percent today, Volpon said. Brazil’s fiscal deficit widened to 3.4 percent of GDP in the 12 months through June, up from 3.3 percent in May and 2.3 percent two years ago.

Volpon believes there is “a good prospect” of the measures being implemented early in a Rousseff administration, when her political capital is high.

State Sector

Rousseff’s economic team may also be considering a rule to limit the growth of public spending to below the growth of gross domestic product, as well as reforms to the tax code, Volpon said.

The measures would help Rousseff politically by distinguishing her from Lula. Lacking her mentor’s charisma, Rousseff could struggle to hold the ruling coalition together unless it succeeds in setting the policy agenda, Volpon said.

“If Dilma cannot come out from Lula’s shadow early in her administration, the chances that her presidency will end in failure will be quite high, especially if Brazil confronts any kind of serious economic set-backs, something that did not happen during Lula’s eight year reign,” Volpon said.

Rousseff may defeat opposition candidate Jose Serra in the first round of voting October 3, a Sensus poll released yesterday showed.

The Workers’ Party candidate was supported by 46 percent of those surveyed, while former Sao Paulo Governor Serra had 28.1 percent, and Green Party candidate Marina Silva had 8.1 percent, according to the poll taken Aug. 20-22.

A candidate must poll more than 50 percent of valid votes, or more than her competitors combined, to avoid a runoff.

Volpon wrote that Rousseff’s possible naming to her cabinet of former Finance Minister Antonio Palocci, or current Economic Policy Secretary Nelson Barbosa, would be a “very good sign.”

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