Rousseff Re-Elected on Call to Save Brazil’s Social Gains

Updated on
Brazil’s President Dilma Rousseff
Dilma Rousseff, Brazil’s re-elected President. Photographer: Paulo Fridman/Bloomberg

Brazil’s re-elected President Dilma Rousseff promised “great changes” in her second term, starting with a plebiscite on political reform and open dialog with her critics, after winning the country’s top job by the tightest margin since at least 1945.

“Sometimes in history, narrow results produce much stronger and faster changes than very wide victories,” Rousseff said yesterday in her victory speech. “I will and I want to be a much better president than I have been up to now.”

Rousseff, who has maintained record-low unemployment even as the economy posted the slowest growth under any Brazilian president in more than two decades, won 52 percent of the vote, while Senator Aecio Neves earned 48 percent.

Brazil’s first female president faces the challenge of pulling the economy out of recession, slowing above-target inflation and narrowing a budget deficit that threatens the country’s investment grade status. She also needs to calm markets: preferred shares of state-run oil company Petroleo Brasileiro SA tumbled 7 percent in Germany today after her victory. Leme Investimentos said stocks may fall as much as 10 percent today.

The real fell 3.2 percent shortly after trading opened and stood at 2.5318 per dollar, down 2.3 percent, at 9:06 a.m. local time.

Rousseff said her “first and most important” task is an overhaul of the political system that will help reduce corruption.

‘Great Changes’

During the campaign she proposed a ban on corporate funding of campaigns and rules to increase the number of female candidates in elections. Congress needs to approve the changes.

“I know I’m being returned to the presidency to make the great changes Brazilian society needs,” Rousseff, 66, said. “This is my first commitment for the second-term: dialog.”

In his concession speech, Neves said unifying Brazil was Rousseff’s main challenge.

Investors rooted against Rousseff throughout the campaign on the grounds that her policies fueled inflation, stalled growth and withered investment. Brazil’s stock market and currency weakened when polls indicated Rousseff might win, including a 6.8 percent drop in the Ibovespa index during the final week as polls showed her support rising.

The NEXT FUNDS Ibovespa Linked ETF, an exchange-traded fund investing in Brazilian equities, dropped by as much as 9 percent in Tokyo.

The real has weakened 34 percent since Rousseff took office, more than all but one of the 16 major currencies tracked by Bloomberg. The Ibovespa has lost 25 percent.

‘Selloff Monday’

“We expect Brazil markets to see a negative knee-jerk sell-off Monday, though this result was mostly priced in,” Brown Brothers Harriman & Co. strategists, including Marc Chandler, global head of currency strategy, wrote in an e-mailed note. “The first 100 days will be very important in setting the table for the next four years. But for now, brace yourselves.”

Rousseff said yesterday she will continue to fight inflation with rigor, advance in fiscal responsibility and take measures to boost economic growth. In September, she said Finance Minister Guido Mantega, who investors see as responsible for the widening budget gap, would not return in her second term.

“I will take urgent actions especially on the economy to return our rhythm of growth and continue guaranteeing high levels of employment and assuring salary increases,” Rousseff said. “We will give more impetus to economic activity in all sectors, especially industry.”

Brazil’s Slowdown

Domestic issues will be exacerbated by a more challenging international environment, which Rousseff has blamed for much of Brazil’s slowdown. Global growth is faltering, and an increase in lending costs in the U.S. could increase capital outflows. Prices of commodities -- which account for 50 percent of Brazilian exports -- are down this year, including 40 percent for iron ore and 17 percent for soybeans.

Rousseff will need to reach out to the opposition to bolster the economy and rebuild relationships hurt during the campaign, Andre Cesar, a political analyst, said by phone from Brasilia following the vote. She needs to pick a finance minister from outside her party, he said.

“She has to give a clear and rapid signal to the financial market,” he said. “She needs something fast. There’s not much time.”

In the run-up to the election, more than two-thirds of Brazilians polled by Ibope said they’re looking for change. Last year, 1 million took part in street protests, as the growing middle class expressed demands for better education, health services and public transport.

‘Electoral Terrorism’

Some supporters of Rousseff railed against the media last night, chanting against Brazil’s biggest media group Globo in the Brasilia hotel where the president gave her victory speech. One person at the event interrupted a television reporter who was filming a segment, calling the journalist a fascist.

In the final days of the campaign, Rousseff accused Brazil’s most-read weekly magazine, Veja, of carrying out “electoral terrorism” to hurt her re-election bid. Veja reported Oct. 23 on its cover that Rousseff was aware of an alleged scheme to funnel kickbacks from Petroleo Brasileiro SA to politicians. She denies the allegations.

Rousseff channeled the call for change by promising a “new government” with “new ideas.” She also cast doubt on what sort of shift Neves would represent, saying he would boost interest rates to shock inflation down to target, triple the jobless rate and curtail social programs.

Economic Performance

Rousseff defended her economic performance by saying she preserved jobs in the face of the global economic crisis. While the economy entered recession in the first half of this year, September’s 4.9 percent unemployment rate was a record low for the month. Real average income has risen 10 percent during Rousseff’s tenure and 33 percent in the past decade.

Her Workers’ Party has built support through programs such as Bolsa Familia, which transfers cash to 14 million poor families, and a public housing drive that will have 2.75 million homes contracted by year-end, with 3 million more planned. Her Mais Medicos, or More Doctors in English, program sent 14,000 Brazilian and foreign doctors into under-served areas.

The government has also funded post-high school technical education for families that benefit from welfare programs, while Rousseff and her predecessor Luiz Inacio Lula da Silva provided 20 billion reais ($8.1 billion) in subsidized loans to about 1.6 million students and scholarships for 1.4 million Brazilians.

‘Economic Standards’

“Voters have gone through a rapid rise in their economic standards and conditions, and that benefits the incumbent,” Christopher Garman, head of emerging markets research at political risk consulting firm Eurasia Group, said by phone from Washington. “When the incumbent says if you vote for the opposition you run the risk of losing what you have, that resonates.”

The swelling of the middle class places a greater burden on Rousseff to deliver economic growth, said Paulo Sotero, director of the Brazil Institute at the Woodrow Wilson International Center for Scholars. She says Finance Minister Mantega won’t stay on in her second term, which indicates she has heard the market’s call for renewal and will bring in “new blood,” he said.

“People want to see actual measures, actual policy that responds to some of their concerns of excessive taxation, excessive bureaucracy, excessive government interventionism, and a completely clogged regulatory system -- those are the real issues,” Sotero said by phone.

Business Confidence

Business confidence as measured by the National Industry Confederation is at its lowest level in more than a decade. Investment in 2013 amounted to 18 percent of gross domestic product, the lowest of all nations in the so-called BRICS group and less than half China’s rate, according to the World Bank. It hit 16.5 percent of GDP in the second quarter, the least in 7 1/2 years.

While restoring confidence to boost investment will be important, Rousseff’s greatest challenge is slowing inflation to the 4.5 percent target and re-anchoring expectations, according to Alberto Ramos, chief Latin America economist for Goldman Sachs Inc. Annual price increases exceeded that level her entire term and reached 6.75 percent in September, above the 6.5 percent ceiling of the target range.

Moody’s Investors Service raised the possibility that it could cut Brazil’s credit rating to junk when it lowered the outlook to negative on Sept. 9. The move came six months after Standard & Poor’s lowered Brazil’s rating for the first time in more than a decade to one level above junk, citing weak growth and worsening fiscal accounts. A string of monthly primary deficits suggest this will be the second straight year the government fails to meet its budget surplus target.

Global Slowdown

Rousseff and Mantega have said Brazil’s first technical recession in five years is the result of headwinds from the global slowdown. The world economy will grow about eight times faster than Brazil in 2014, according to economists surveyed by Bloomberg, who expect Latin America’s largest nation to grow 0.3 percent this year and 1.3 percent in 2015.

The state of the economy did not deter Rousseff’s supporters, especially in the poorer regions of the country such as the northeast, who have benefited under the Workers’ Party, according to Eurasia’s Garman. She won in all nine northeastern states, one of the poorest regions in Brazil. She lost in Sao Paulo, the richest and most populous state in the country.

“She did some things that helped us here in the lower class,” said Alan Silva, a 31-year-old unemployed resident of Rio de Janeiro’s Mangueira slum. “I wasn’t sure the change Neves was going to do was going to work. It’s not good to keep changing.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE