Why Rousseff’s victory received mixed reactions in Brazil
Investor must-know: Why Brazil faces challenges and opportunities (Part 5 of 11)
Dilma Rousseff’s victory
Dilma Rousseff, chief of the Worker’s Party in Brazil, was re-elected as President. She was re-elected on October 26. Rousseff edged out Aecio Neves of the Brazilian Social Democracy Party. She received ~51% voted against Neves’ 48.5%.
The small 2.5% difference in the popularity score shows that many people celebrated Rousseff’s re-election. The re-election was also shunned by a proportion of the public.
In this part of the series, we’ll assess how the Brazilian economy performed under Rousseff’s first four-year term as President. Her first term started on January 1, 2011.
Brazil under Rousseff’s first term as President
In January 2011, Rousseff became the President of Brazil. Brazil’s economy was in pretty good shape. Economic growth touched 7.5% in 2010, according to the International Monetary Fund (or IMF). The growth was driven by the commodity boom.
During Rousseff’s first four years of service, the Brazilian economy witnessed a marked slowdown. Recessionary conditions set in with inflation crossing the central bank’s target. Public debt increased to damaging levels. The current account deficit touched its widest point since 2002. Also, the country’s credit rating was downgraded to a notch above junk.
The Petrobras scandal was associated with Rousseff’s first term. The scandal raised more doubts about Rousseff’s continuation for a second term.
During Rousseff’s first term as the President of Brazil, Paulo Roberto Costa—the former director of supply at Petrobras—was arrested for planning a bribery scheme on a grand scale. The bribery scheme took place at the company. He funneled the proceeds to the governing Worker’s Party, its allies, and himself. The Worker’s Party is chaired by Rousseff.
What Rousseff’s win means for Brazil
Rousseff’s win means that one party will have ruled over Brazil for 16 years—the Worker’s Party. This may not be desirable for an economy, especially if the economy doesn’t seem to be moving forward.
Rousseff’s win directly implies that the political and economic model of state-centered economic development will remain in place for the moment.
The government will continue with its high levels of public spending.
With the current reduced global oil prices, the Brazilian government faces less of a financial burden from selling subsidized fuels domestically than it did in the past. Reduced global oil prices tend to hurt top lines of oil companies—like Petrobras—that export oil. A decline in subsidies by the Brazilian government could be a silver lining for Petrobras. Otherwise, Petrobras could be affected by this subsidy in the long run.
In an attempt to revive the economy, Brazil may need to search for additional markets abroad that are outside of the Common Market of the South—also known as Mercosur—to improve the competitiveness of its output. However, such a measure goes against Rousseff’s election platform. The election platform stressed continuity with Mercosur.
In its fourth term, the Worker’s Party is also entrusted with the task of boosting its manufacturing exports. At one time, manufacturing exports fueled Brazil’s growth engine. However, the manufacturing exports declined rapidly because of the economic crisis in its primary trading partner—Argentina.
The Global X MSCI Argentina ETF (ARGT) invests in the top 20 companies within Argentina’s investment universe. Currently, the economy is undergoing an economic crisis. Investor may want to exercise caution while investing in Argentina’s economy.
In contrast, the iShares MSCI Brazil Capped ETF (EWZ) tracks the Brazilian markets. It’s invested in firms like Vale SA (VALE), Itau Unibanco Holding SA (ITUB), and Petroleo Brasileiro SA Petrobras (PBR). These firms may be a safer bet.
In hindsight, Brazil could benefit from Argentina’s economic crisis. We’ll discuss this in the next part of the series.
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