Neves to Face Rousseff in Brazil in Surprise Comeback

Aecio Neves pulled off a surprise second-place finish to force a runoff with Brazilian President Dilma Rousseff, pitting a candidate favored by investors against an incumbent who says the end of her party’s 12-year rule threatens policies that pulled 35 million out of poverty.

The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent and Marina Silva with 21 percent, Brazil’s Superior Electoral Court reported based on 99.99 percent of ballots counted.

“Those in the government lost their chance to make the country grow,” Neves said yesterday at a press conference at his campaign headquarters as supporters cheered outside. “They lost their opportunity to control inflation.”

With combined support for the two main opposition candidates topping Rousseff’s, the final vote will be the most contested of the past three presidential elections, said David Fleischer, a professor of political science at the University of Brasilia. He estimates Neves has a 45 percent chance of winning, and markets rallied today on speculation Rousseff, who argued her policies protected jobs during a global crisis, won’t be re-elected.

Brazil’s benchmark Ibovespa stock index rose 4.9 percent at 1:21 p.m. local time. State-controlled Petroleo Brasileiro SA rose 11.1 percent. The real strengthened 1.7 percent to 2.4171 per dollar.

Swap rates on the contract due in January 2017, the most traded in Sao Paulo today, fell 22 basis points, or 0.22 percentage point, to 11.90 percent.

‘New Ideas’

Rousseff will have to go beyond her strategy of trying to take down her adversary by telling voters Neves would undo social programs and adopt policies that would lead to a recession, Rafael Cortez, a political analyst at consulting firm Tendencias, said by phone yesterday.

“We have new ideas for the economy,” Rousseff told supporters in Brasilia yesterday evening. “We’re going to control inflation even more, but without producing the so-called adjustments and unpopular measures -- the wage squeeze and the unemployment -- that we had during governments of the PSDB.”

Silva in her concession speech last night said Brazilians voted against the government, expressing a desire for change. She said the parties in her coalition will discuss whether to endorse a candidate in the second round on Oct. 26. Silva will meet with her allies on Oct. 8, Agencia Brasil reported today.

“Brazil clearly signaled it doesn’t agree with what is there,” she said.

More Votes

For much of the year stocks rallied on falling support for Rousseff in opinion surveys as investors bet an opposition candidate would do more to improve Brazil’s business environment, bring down above-target inflation, and reduce deficit spending.

Neves received more votes than the 26 percent support he garnered in a Datafolha poll released Oct. 4. Rousseff had 44 percent in the poll that had a margin of error of plus or minus two percentage points.

Neves will need to convert about 70 percent of those who voted for Silva in the first round in order to win, Tony Volpon, managing director for emerging-markets research for the Americas at Nomura, wrote in a note today.

United Opposition

Former Brazilian President Fernando Henrique Cardoso, one of the heads of Neves’s party, said that he believes supporters of all opposition candidates will unite in the second round of the election, according to a report on newspaper Valor Economico’s website yesterday.

“If Silva were to formally announce her support for Neves, it might be possible for him to catch up with Rousseff,” Barclays Plc analysts Bruno Rovai and Marcelo Salomon wrote in a note today. “However, it would likely be an uphill battle and, given the first-round backdrop, would continue to be a nail-biting campaign.”

Eurasia Group analyst Christopher Garman, who correctly predicted Silva would fall in polls when she was beating Rousseff in August, said markets will over-estimate the odds of Neves winning the final election. Eurasia gives the president a 70 percent chance of winning.

The PSDB and PT have alternatively been in power since 1995. Senator Neves, 54, draws his support from voters with higher incomes and more education, polls ahead of the vote showed. Rousseff gets most of her backing among lower income families.

Sao Paulo

Voters re-elected PSDB candidate Geraldo Alckmin as governor of Sao Paulo, the most populous state in Brazil. Fernando Pimentel of the PT won Minas Gerais, the second-most populous state. Brazilians also voted to renew all 513 seats in the lower house of Congress and one-third of the Senate.

While Rousseff’s party will remain the largest in the lower house of Congress, it will lose 18 seats to have 70 votes, based on partial election results, the Chamber of Deputies news agency reported today. Neves’s party would gain 10 seats to have 54 deputies, the agency said.

Neves, former governor of Minas Gerais, appealed to investors by pledging to slow inflation to the 4.5 percent target within two years and gradually lower the target to 3 percent. He said he would name former central bank President Arminio Fraga, who introduced inflation targeting in Brazil in 1999, as his finance minister to regain investor confidence.

Neves watched the results coming in from his apartment in Minas Gerais state capital Belo Horizonte. Supporters of the candidate danced outside of his headquarters in the city as results showed him heading to the second round.

’New Blood’

“Brazilians are ready for change,” said Carlos Martins, 59, a retired metal worker. “Brazil wants new blood.”

The PSDB candidate pulled off a turnaround after Silva led him in polls going into the final week of the campaign. Once Silva became the candidate following the Aug. 13 death in a plane crash of her running mate, she surged to a lead over Neves of as many as 19 percentage points in the first round, according to a Datafolha poll published Aug. 29. Her ascent stalled after the PT began airing attack ads. Neves also jabbed at Silva by accusing her of inexperience and flip-flopping.

Renew Policies

Rousseff, 66, said in Belo Horizonte on Sept. 3 that she would renew her team and policies in a second term, without providing details. Government-led infrastructure projects will pave the way for economic growth in coming years, she said, pledging to build an additional 3 million low-cost houses, expand access of students to vocational training, and use state-run banks to subsidize consumer loans and investment projects.

The president watched the results come in from her official residence in Brasilia and met with members of her cabinet. Supporters in the federal capital gathered at a hotel near the presidential palace as her campaign jingle, describing Rousseff as a “brave heart” in the face of adversity, played over loudspeakers.

“People who vote for Aecio don’t understand his proposals,” Felipe Arnaud, a 20-year-old veterinary student, said. “I don’t want a minimal state here. We need to have a bigger state and a moderated private sector in order to make the economy grow again, while providing opportunities for Brazilians with less resources.”

While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Annual Growth

During the 2003-2010 government of Rousseff’s mentor, Luiz Inacio Lula da Silva, Brazil’s economy averaged 4.1 percent annual growth to become the world’s second-biggest market after China. That pace slowed to an average of 2.1 percent in the first three years of her administration. Economists in the latest weekly central bank survey forecast growth of 0.24 percent this year and 1 percent in 2015.

“It remains early days, but the likelihood that elections might prove to be the trigger for the much-needed shift in policy needed to revive Brazil’s flagging economy is at least greater than a few weeks ago,” Neil Shearing, chief emerging markets economist at Capital Economics, wrote in a note today.

Weaker Currency

Under Lula, the real strengthened more than 100 percent, the best performance among the 16 most-traded currencies tracked by Bloomberg, while the benchmark Ibovespa stock index rose more than sixfold. Since Rousseff took office on Jan. 1, 2011, the currency has declined 31 percent and the stock index has lost about 16 percent.

Brazil risks losing its investment-grade rating during an eventual Rousseff second term, Siobhan Manning-Morden, head of Latin America fixed-income strategy at Jefferies Group LLC, wrote in a report today. Standard & Poor’s in March cut Brazil’s credit rating to one level above junk, and Moody’s Investors Service last month raised the possibility Brazil may eventually be lowered to junk, or two levels below its current rating, when it cut the nation’s outlook to negative.

Rousseff is still the favorite because as an incumbent she can implement measures during the campaign to build support, Fleischer said. In the run-up to the first round, the government announced a program to increase tax breaks for exporters and raised the number of low-cost houses it would build.

“It’s going to be a hot, nasty campaign,” Fleischer said.

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