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Rousseff Pledges to Guard Against Inflation in Brazil

Brazilian President Elect Dilma Rousseff
Brazilian president elect Dilma Rousseff. Photographer: Adriano Machado/AFP/Getty Images

Brazil’s President Dilma Rousseff pledged to prevent the “plague” of inflation from undermining her plans to eradicate poverty in Latin America’s biggest economy while fostering economic growth.

“To ensure the continuation of the current economic growth cycle we need to ensure stability, especially price stability,” Rousseff said in her inaugural speech to Congress yesterday. “We won’t allow under any hypothesis that this plague returns to eat away our economic tissue and hurt the poorest families.”

Rousseff received the presidential sash from Luiz Inacio Lula da Silva, who exits as the most popular leader on record in Brazil after overseeing growth last year forecast to be the fastest since the mid-1980s. She vowed to contain spending and tackle obstacles to sustained growth such as a complex tax system.

Brazil’s first female president said her “most obstinate fight” will be to eradicate poverty. She emphasized that only economic growth can generate the jobs necessary for coming generations and allow the country to overcome income inequality.

Some 70,000 Brazilians lined the streets of Brasilia to watch as Rousseff was driven from the Congress to the presidential palace. U.S. Secretary of State Hillary Clinton was followed by Venezuelan President Hugo Chavez in a line of foreign dignitaries who greeted Rousseff and Vice-President Michel Temer.

Key Posts

Rousseff met today in Brasilia with Spanish Prince Felipe, Uruguayan President Jose Mujica, South Korean Prime Minister Kim Hwang Sik, Portuguese Prime Minister Jose Socrates, Palestinian Authority President Mahmoud Abbas, Cuban First Vice President Jose Ramon Machado Ventura and former Japanese Prime Minister Taro Aso to discuss bilateral agendas.

With economists in key posts, Rousseff will give priority to modernizing the country’s roads, ports and airports ahead of the 2014 World Cup and 2016 Olympics, said David Fleischer, a political analyst at the University of Brasilia. The government may raise tariffs and taxes on capital inflows as businesses struggle with a currency that has strengthened 39 percent against the U.S. dollar since the start of 2009, Fleischer said.

“We will act decisively in multilateral forums in defense of a healthy and balanced economic policy, protecting the country from unfair competition and from the indiscriminate flow of speculative capital,” Rousseff said.

She also said measures to simplify the country’s tax system can no longer be postponed.

Rousseff will implement a “fiscal adjustment” while preserving investments under the government’s growth acceleration program, Paulo Bernardo, who will step in as communications minister after serving as budget minister under Lula, said to reporters yesterday.

Rousseff inherits from Lula inflation running at an annual pace of 5.79 percent. That’s less than the 17.2 percent Lula faced his first year in office, though still the fastest in 23 months. Inflation will remain above the government’s 4.5 percent target through the end of 2011, according to a central bank survey of economists published Dec. 27.

Higher Rates

Traders are betting incoming central bank President Alexandre Tombini will begin raising the overnight Selic rate 50 basis points to 11.25 percent at the bank’s Jan. 18-19 meeting, according to Bloomberg estimates based on interest rate futures contracts. Brazil’s rates are the second-highest in the Group of 20 nations after Argentina.

Rousseff, who served as Lula’s cabinet chief and energy minister, had never run for public office before entering the presidential race. With her former boss’s endorsement, she won 56 percent of the votes in an Oct. 31 runoff against Jose Serra, a former governor of Sao Paulo state.

Dozens of dignitaries attended the ceremony, including Bulgaria’s Prime Minister Boiko Borissov. Rousseff’s father immigrated to Brazil from the Eastern European nation in the 1940s.

Rousseff also invited 11 women with whom she shared a prison cell after being arrested in 1970 for fighting Brazil’s military dictatorship as a member of the underground VAR Palmares group.

Prison Years

After three years in prison, where she was tortured, Rousseff studied economics and settled in the state of Rio Grande do Sul with her second husband, Carlos Araujo, an underground leader. They separated in 1994.

Rousseff joined Lula’s Workers’ Party before his 2002 election. After serving as energy minister, she replaced longtime Lula ally Jose Dirceu as Cabinet chief in 2005, when he and several party stalwarts resigned over allegations they knew about payments made to lawmakers in exchange for votes.

Her candidacy was put in doubt when she announced in April 2009 that she was being treated for lymphoma. Five months later, her doctors pronounced her in “excellent health.”

High Expectations

Brazilians have high expectations for Rousseff. Her government will be as good, or better, than Lula’s according to 83 percent of those surveyed in a Datafolha poll published Dec. 22.

Lula, who is banned by the constitution from seeking a third consecutive term, leaves office with a record 83 percent approval rating, the same survey showed, after he helped lift 21 million people from poverty and cut unemployment in November to a record low 5.7 percent.

Investors are more cautious. The Bovespa index of most-traded stocks has fallen 1.9 percent since Rousseff’s election, reducing last year’s gains to 1 percent compared with average annual returns of 29 percent during Lula’s first seven years in office. Last year’s performance was the worst-ever when measured against the MSCI Emerging Markets index, which rose 17 percent.

Yields on interest-rate futures contracts have also risen, as investors step up bets she’ll fail to contain spending that rose 25 percent last year and helped the economy grow 7.3 percent, according to central bank estimates.

Overvalued Currency

The higher rates are attracting capital that has made the real the most overvalued currency in the world according to Goldman Sachs Group Inc. Under Lula the currency more than doubled in value to 1.66 per U.S. dollar from 3.54.

Economists expect foreign investment to develop deep-water oil discoveries by state-controlled Petroleo Brasileiro SA to bolster the currency.

Finance Minister Guido Mantega, one of 13 Lula ministers who will also serve in Rousseff’s cabinet, tripled to 6 percent in October a tax on capital inflows in a bid to stem the rally. Rousseff will probably take measures to contain gains in the real, Mantega said Dec. 30.

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