Will Roussef do a Lula? Rousseff’s leftwing PT has pulled off this trick before. In 2003, Luiz Inácio Lula da Silva, Rousseff’s predecessor and mentor, embraced the orthodox policies of the previous PSDB government that he had campaigned against for years. His two terms included several years of healthy growth.
Elmat: Roussef doing an about face is what keeps her awake at night. That she will be known for the masses, and her neighbors Nenezuela, Bolivia and Cuba as the one who sold out to the capitalists
But Lula was operating in the context of a global economy driven on by the commodities super-cycle and by floods of cheap money. Against such a backdrop, he was able to keep the PSDB’s reforms in place but had no need to advance its reform agenda, which he and (especially) Rousseff always found unpalatable.
Elmat: Roussef has to do more than Lula to kick start growth. Perhaps her past as energy minister and PBR Chairwoman becomes a liability rather than an asset.
First she was investing on the belief the PBR nationalists were hellbent on building a a national champion when the fact was they were just a teat for the oligarchs to suck as the corruption cases are shown.
Second her narrow views of what it takes to run the country has been showing just after she took the helm. She was looking to Brazil as a budding Venezuela/Norway. She forgot that oil is just 5% of the GDP.
Overall she has two failings: she is not very intelligent not have surrounded herself with good advisers as she preferred to hear what she wanted to hear.
I can tell you the middle class is scared of her. Since 1993 I have been telling Brazilians: It is good to have PT get the power. Have their go at it. And get booted as lesson to the hordes of Brazilians that think a leftist government is the solution.
The article below is still trying to build a case for a 'flight to quality' which I keep saying is not going to happen (barred a total screw up by Roussef) like renegating on what he promised to the guys who allowed her to win.
Brazil’s fading economy sounds a warning for EM
Jonathan Wheatley | Jan 12 14:38 |
The year is barely under way and already Brazilian analysts are hurriedly revising down their projections for economic growth in 2015. In the central bank’s second weekly survey of market economists of the new year, published on Monday, gross domestic product is seen expanding by just 0.4 per cent, down from 0.5 per cent expected last week and about 0.7 per cent a month ago.
It is an inauspicious way to begin a year that not only will be hugely significant for Brazil but in which Brazil – or so Manoj Pradhan and Patryk Drozdik of Morgan Stanley argue in a note on Monday – will be hugely significant for the rest of EM.
As Brazil embarks on president Dilma Rousseff’s second four-year term in office, it is no exaggeration to say its future hangs in the balance. Rousseff (pictured above) won last October’s election partly by demonising the “neo-liberal”, market-friendly policies proposed by her opponent, Aécio Neves of the centrist PSDB. But faced with an urgent and increasingly desperate need to generate economic growth, she has appointed a market-friendly economics team that might have been chosen by Neves himself.
Rousseff’s leftwing PT has pulled off this trick before. In 2003, Luiz Inácio Lula da Silva, Rousseff’s predecessor and mentor, embraced the orthodox policies of the previous PSDB government that he had campaigned against for years. His two terms included several years of healthy growth.
But Lula was operating in the context of a global economy driven on by the commodities super-cycle and by floods of cheap money. Against such a backdrop, he was able to keep the PSDB’s reforms in place but had no need to advance its reform agenda, which he and (especially) Rousseff always found unpalatable.
Investors are now putting their hopes in the idea that Rousseff will adopt and enforce PSDB-like policies in a much more challenging global context.
If that notion sounds far-fetched, it is nevertheless re-enforced by the belief that there is no alternative. Indeed, Pradhan and Drozdzik preface their analysis by writing that:
The bear case is not that domestic adjustment in Brazil doesn’t happen, but that it happens at the same time as a serious flare-up of one of the external risks.
Some of those risks read more like certainties. They are: rising US interest rates; a strengthening US dollar; slower than expected growth in China; and falling commodity prices.
Even so, argue Pradhan and Drozdzik:
Investors appear to have forgotten the lessons of Europe’s fiscal austerity, where plans for austerity were cheered, but austerity when deployed hurt both growth and markets.
Brazil, they argue, is one of only two emerging economies (the other being China, where authorities have the ability to stabilise growth) in which “policy-induced adjustment could become disruptive”. This makes it uniquely placed to export contagion to other EMs.
It is also, they write, uniquely placed in its exposure to all four of the risks listed above. And the fact that investors have so heavily bought into Brazil multiplies the risk that contagion will spread to other EMs:
We have argued in the past that economies that receive capital inflows unconditionally face a higher risk of a sudden stop. Significant academic research has supported this stylised fact. Recent OECD analysis suggests that the probability of a banking crisis or a sudden stop is multiplied four-fold after an episode of large capital inflows. If the inflows are debt-driven, the probability is even higher (see OECD, Getting the Most Out of International Capital Flows, 2011).
Based on their analysis of external and (internal) structural factors, they produce the following matrix of EMs in 2015:
And as further food for thought, they highlight the recent sharp increase in foreign ownership of EM domestic debt – “the Achilles’ heel of EM”:
As they warn:
EM fixed income markets become illiquid very quickly. An interest rate shock can be propagated to other asset classes and even other economies very quickly.
The authors conclude by suggesting that whether or not EM assets survive rising US rates and falling China leverage “depends on whether Brazil gets through its macro adjustment unscathed”. Some might also factor in the risk that Brazil fails properly to implement its macro adjustment in the first place.
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