Markets predict difficult ride for Rousseff if she gets re-elected

If President Dilma Rousseff wins Brazil’s elections next month, she will face the double challenge of implementing the changes expected by 80 percent of voters while also meeting the expectations of the financial markets.

On Monday, the stock exchange sent the Workers’ Party (PT) candidate a tough message in the form of a drop of nearly five percent from Friday’s closing value. Shares in state oil company Petrobras fell 11 percent, while the dollar gained 1.53 percent against the real, reaching December 2008 levels.

The erratic behavior was reminiscent of the pre-election period in 2002, when Lula da Silva – then an unknown candidate for the PT – was leading the opinion polls and the stock market was fluctuating wildly.

Although a few main indicators are doing better today than they were 12 years ago, the scenario for a second Rousseff administration is much tougher than it was back then, says economist Zeina Latif.

“That year, there was a fear of what was coming. Now it’s a different story, since the government’s credibility has been seriously undermined,” says Latif.

Making peace with the markets will be essential if Rousseff is to govern properly over the next four years

What if the Datafolha survey released on Friday evening had shown Marina Silva, of the Socialist Party, at the top of the polls instead of Rousseff? “In that case, the financial markets would have remained on the path of recovery that began on Friday,” says Clodoir Vieira of trading firm Souza Barros.

But that recovery was based on a rumor that the survey would show Silva out in front and that a weekly magazine was about to publish a story that would be devastating for the Rousseff administration – something that never happened.

But the idea of four more years of Workers’ Party rule is worrying investors and financial agents who feel that the state will continue to interfere with the economy.

“The market is manichean. It believes that Rousseff is evil, period. There is no political analysis behind this concept. The market dislikes the president, and the feeling is mutual,” says Luis Eduardo Assis, former director of the Central Bank.

Yet Marina Silva’s honeymoon with the markets has faded somewhat since the beginning of the presidential campaign as a result of her change of tack on the issues.

In any case, Rousseff will have to get friendlier with financial agents, says Assis. “She will need to think about institutional stability and will not be able to err as she has until now. She will have to do this out of pure political pragmatism.”

In other words, making peace with the markets will be essential if Rousseff is to govern properly over the next four years without causing trouble for Brazil or for the PT, says Assis.

Zeina Latif feels that even though the country has more robust international reserves than in the past, fiscal indicators have deteriorated rapidly.

“There is a clear bad fiscal conduct, and activity indicators are fragile. And we still run the risk of losing out investment grade status with the credit rating agencies,” adds Latif.

If she is re-elected, Rousseff will have to choose a successor for current Treasury Minister Guido Mantega and possibly a new Central Bank chief. She will also have to come up with a list of specific measures to reboot the economy without harming the public coffers.

That is how Lula da Silva, then an unknown factor, won the heart of the market. When he took office, businesspeople waited before launching their own projects out of fear of drastic changes to the economic model. They were still traumatized by memories of former president Fernando Collor (1990-1993), who confiscated Brazilians’ savings early on in his administration.

Now, Rousseff faces the added challenge of winning over the markets – even though they already know exactly how she feels about them.