Marina Silva, the Brazilian environmentalist who was defeated in the first round of the president election last Sunday, is today expected to announce her conditional support for financial markets’ favourite Aecio Neves, the main opposition candidate who will face off the incumbent Dilma Rousseff at the end of the month.
Silva sent a list of conditions to throw her support behind Neves, even though her PSB party was formally endorsed voting against Dilma Rousseff. She is understood to have asked for a greater emphasis on social and environmental policies and a watering down of Neves’ law and order programme.
Her decision will be announced as Arminio Fraga, the seasoned investor who will become finance minister if Neves is elected, unveils his strategy to shore up the embattled Brazilian economy at an event in Washington.
Fraga dealt with the impact of the 1999 devaluation and implemented the inflation targeting regime during his stint as central bank governor and is considered a safe pair of hands.
“He is a very smart guy and he is a great communicator with the markets,” said James Barrineau, co-head of emerging markets debt relative return at Schroders in New York.
However, initial market excitement has subsided on Wall Street after the fireworks following the performance of the main opposition candidate, who was trailing in the polls during most of the electoral campaign and ended up eight points behind Rousseff.
“The investors’ message has been very clear. It’s thumbs down to Dilma Rousseff and thumbs up for anyone else,” said Arturo Porzecanski, professor at the American University.
“There are doubts in the market [about the electoral outcome]. If Dilma wins, the market will go down,” said Luiz Fernando Figueiredo, managing partner at Maua Sekular, an investment firm in São Paulo.
Nevertheless, foreign bond rates have been quite flat in recent days. “The yields have not changed that much,” said Georges Ugeux, head of Galileo, an investment boutique on Wall Street.
Past experience shows that whoever arrives in pole position at the first round election has a far greater chance to be elected. “People here expect Dilma Rousseff to win,” said Ugeux.
RISING INFLATION
Bad economic news has piled up on Rousseff’s desk in recent days, from a fourth consecutive monthly primary fiscal deficit to above-target inflation. The consumer price index hit 6.75% per year in September, its highest level since 2011, and higher than the 6.5% upper limit defined by the inflation targeting regime.
Rousseff has already said that she would change her finance minister if elected, but she has not been clear whether policies will be adjusted. Paulo Sotero, head of the Brazil Institute at the Wilson Center, said new disclosures regarding corruption at Petrobras, the state controlled oil company, might undermine Rousseff’s chances. “There are people who are ready to leak information,” he said.