October 28, 2014
Following the most disputed presidential elections in Brazil since the return of democracy in 1985, incumbent Dilma Rousseff was re-elected with 51.64% of the votes. The elections showed vitality and efficiency, while the campaigns were divisive and rife with accusations of corruption, including claims of bribes related to lucrative contracts with Petrobrás, the state-controlled oil company, further eroding trust in the government.
Both the President and opponent Aécio Neves reacted to the results in a mature manner, but the markets did not receive the news well. On October 27th, the Brazilian stock market (Ibovespa index) fell 2.77 %, with Petrobrás shares declining dramatically (minus 12.33 %). The Brazilian real depreciated 2.68 % vis-à-vis the dollar, in spite of central bank interventions.
We have seen this "film" before. In 2002, markets reacted negatively to the prospects of a victory by Rousseff's Partido dos Trabalhadores (PT). So much so, that the incumbent Cardoso administration decided to counteract fears that Luís Inácio Lula da Silva would win by securing a massive IMF stand-by credit of roughly US$ 30.4 billion. This helped allay market concerns, and once Lula was elected, the "fear of the unknown" was rapidly tamed as the new administration signalled the maintenance of a conservative macroeconomic approach while committing to sound monetary policies.
The "script" today is different even though market reactions are similar. What is moving markets is not the fear of the unknown, but the "fear of the known" as some analysts have already noted. In other words, the prospects of Rousseff continuing the current unsustainable development model and related macroeconomic policies are fostering negative market reactions. As I discussed before
, the current Brazilian model with its inward-oriented flavour, relies on consumption growth driven by income redistribution and credit expansion. Under favorable external conditions, such a model can produce results (particularly on the electoral front) for some time. It has reached its limits, however, because of its negative implications for investment and productivity growth.
Today there is no need to call the IMF. With abundant foreign-exchange reserves amassed through the commodity boom of the last few years, Brazil will be stable in the near future. Still, market sentiment can be quite disruptive. Until clear signs of a revised economic strategy are given (including the announcement of a credible name for the position of Finance Minister) markets will continue to behave badly. Rousseff may be tempted to adopt a more-of-the-same-stuff (MOSS) strategy for her second-term but this brings to mind the popular definition of insanity (attributed to Einstein) of "doing the same thing over and over again and expecting different results." In short, the current "picture" can become a black-comedy for the seventh largest world economy if Rousseff doesn't adopt a new approach.
Carlos A. Primo Braga is Professor of International Political Economy at IMD, and Director of The Evian Group@IMD. He teaches in the Orchestrating Winning Performance program.