In Brazil’s Election, a Stark Vote on the Nation’s Economy
Sunday’s presidential election in Brazil may be too close to call, but investors have already voted with their reais and dollars — and it’s Aécio Neves in a landslide.
Rarely, if ever, has such a pro-growth, market-friendly candidate emerged as a serious presidential contender in a developing country, let alone one as large and influential as Brazil, which has the world’s seventh-largest economy as measured by gross domestic product. With every twist in the polls, the Brazilian stock market surges (if Mr. Neves is ahead) or plunges (if not) while largely ignoring fundamentals like commodity prices, the faltering Brazilian economy or global crises.
Perhaps nothing has more endeared Mr. Neves to investors than his announcement on Oct. 5, right after qualifying for this weekend’s presidential runoff, that he would name Arminio Fraga his finance minister. Mr. Fraga is an unabashed champion of market capitalism and pro-growth government policies. He has a Ph.D. in economics from Princeton and drew international praise as the head of Brazil’s central bank from 1999 to 2002, steering the Brazilian economy through a difficult period that coincided with the implosion of the dot-com bubble and a recession in the United States. He was a managing director at George Soros’s fund in New York, and after leaving Brazil’s central bank, he helped start the hedge fund Gávea Investimentos. A unit of JPMorgan Chase acquired a controlling stake in 2010.
Mr. Fraga has a Ph.D. in economics from Princeton and drew international praise as the head of Brazil’s central bank from 1999 to 2002.CreditMark Lennihan/Associated PressPutting a wealthy hedge fund manager like Mr. Fraga on the ticket might be risky even in an avowedly capitalist country like the United States, and in populist Brazil, “Arminio hasn’t exactly been an electoral asset,” said Mario Marconini of Teneo Intelligence and a former foreign trade secretary in Brazil. “All the people in my office in São Paulo love him. But the minute Neves named him, his momentum started to go down.” Dilma Rousseff, the current president, who is running for re-election, has made Mr. Fraga a focus of her recent televised attacks on Mr. Neves.
Neither Mr. Neves nor Mr. Fraga is backing down. “By any standard, we represent a pro-market, pro-growth approach,” Mr. Fraga told me when I spoke with him this week between campaign stops. That this would be resonating with voters in populist Latin America, a region better known for flamboyant leftists like Hugo Chávez in Venezuela and Fidel Castro in Cuba, seems remarkable. But Mr. Fraga said the close race was less a verdict on economic ideology than a strong desire for change. “Most people aren’t motivated by a deep knowledge of economics and what drives growth and productivity,” he said. “But they know that Brazil needs to change to get back on the growth path or it can’t sustain its employment levels and social benefits. And some people are just fed up with all the scandals.”
No wonder investors are applauding Mr. Neves. As governor of Brazil’s second-most-populous state from 2003 to 2010, Mr. Neves cut his own pay nearly in half, balanced the budget and turned years of mounting deficits into a surplus. The World Bank has extolled him as a model of fiscal responsibility and extended his state a billion-dollar loan in 2008. Although he alienated the state teachers union by linking their salaries to performance, Mr. Neves left office in 2010 with a 92 percent approval rating. His telegenic good looks, marriage to a glamorous former model and the birth of adorable twins last month haven’t hurt his appeal.
In contrast, the incumbent, Ms. Rousseff, is a former Marxist guerrilla who praises Mr. Chávez as “a great Latin American.” In the four years since she was elected, annual growth in G.D.P. has plunged from 7.5 percent to near zero, and Brazil may already be in recession. Inflation has jumped to 6.75 percent. During her tenure, the Brazilian stock market has dropped about a third after years of robust gains. In 2013, millions took to the streets to protest higher bus fares and government corruption. Ms. Rousseff has promised, if re-elected, to replace her minister of finance, Guido Mantega, but, according to Mr. Marconini, “everyone knows that the real minister of finance was Dilma herself.”
Critics say Ms. Rousseff’s shortcomings have been especially manifest at Petrobras, the giant oil company that is majority-owned by the Brazilian government. Shares in Petrobras have been especially volatile during the campaign, and “are basically a call option on the election,” said Allen Good, a research analyst who follows Petrobras for Morningstar.
Ms. Rousseff was chairwoman of Petrobras from 2003 to 2010, and as president of Brazil, appoints its chief executive and controls the board. “Petrobras was once highly respected and well run,” Mr. Good said. “It was technically capable. But the government has pretty much destroyed the company in the past five years.”
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Under Dilma Rousseff, who is running for re-election, annual growth in G.D.P. has plunged from 7.5 percent to near zero. CreditRicardo Moraes/ReutersAnd that was before the company was engulfed by scandal, in which the company’s huge revenue appears to have been treated like a giant slush fund to support Ms. Rousseff’s candidacy, as my colleagues at The Times explained this week.
The short-seller James Chanos, who bet against Enron before its collapse, attacked Petrobras this week, calling it “ a scheme, not a stock” on Bloomberg Television. “What I mean by that is that as an arm and ward of the state, decisions may not always be made to the benefit of creditors and shareholders,” he told me this week. “Under Rousseff, the numbers are terrible, and if she’s re-elected, they’re going to get worse.” Moody’s downgraded the company’s debt this week. Since Sept. 2, the stock has fallen to just above $12 a share, from more than $20.
Mr. Fraga said cleaning up Petrobras would be a top priority of a Neves presidency. Ms. Rousseff has imposed price controls on Petrobras to keep retail gas prices and inflation low, but Mr. Fraga said that would change if Mr. Neves were elected. “We don’t believe in price controls, period,” he said. “There’s a widespread feeling that the company has been run by political appointees who aren’t competent and are corrupt. There has to be an overhaul of Petrobras to make it well run and transparent. That’s long overdue.”
Mr. Fraga said Mr. Neves would bring his “shock management” approach to Brazil’s sprawling federal bureaucracy. He would restore fiscal discipline, curb inflation and stop interfering with the central bank, which Mr. Fraga predicted would lead to lower interest rates and renewed economic growth. Mr. Neves has promised major investment in infrastructure, where “the needs are phenomenal" Mr. Fraga said. Tax reform is another priority.
“This is very doable,” Mr. Fraga said. “It’s not rocket science. We will have to deliver. We need a combination of a market-friendly approach and better execution. It’s a mix of ideology and management.”
Can Mr. Neves and Mr. Fraga pull off what would have to be considered a major political upset? In Latin America, incumbent presidents have almost never lost re-election bids, even in the middle of economic and political crises. The most recent polls are mixed.
But polls before the first round of voting grossly underestimated Mr. Neves’s support, perhaps because many voters fear retaliation from Ms. Rousseff’s ruling Workers Party should she be re-elected.
Still, if Mr. Neves loses, “it will be a crushing blow” to investors and business people in Brazil, Mr. Marconini of Teneo Intelligence said, and markets are likely to fall further. “It will be especially disappointing because he got their hopes up,” he said. “It really looked like he could win.” |
