On Sunday Brazilians will take to the polls for the first round of their Presidential elections. At this point the outcome is basically a foregone conclusion, but this fact is giving few people — citizens, investors, observers — any comfort.
These are incredibly unhappy elections, taking place in the midst of a tragic three year economic reversal during which the country’s stock market plunged 22%, according to Bloomberg.
Inflation is high, corporate profit margins are thin, and massive Brazilian companies like steelmaker Vale and and quasi-state oil and gas company Petrobras are suffering from a wide range of ailments from mismanagement and corruption to weak demand from China.
In other words, whoever wins this contest will have a hard road ahead.
There are three candidates in Sunday’s Presidential contest, but only truly two contenders. Aecio Neves, of the Social Democratic Party, is sure to lose but not by enough to allow another candidate to take a clear majority. That means incumbent Dilma Rousseff, of the Workers Party (PT), and Marina Silva of the Brazilian Socialist Party (PSB), will square off on October 26th.
Silva was not meant to be a Presidential candidate. An environmentalist who grew up in extreme poverty, she was initially running along side candidate Eduardo Campos, who died in a tragic plane crash in August.
For a while Campos’ passing sparked interest in Silva. She started pulling ahead in election polls, and it seemed like investors who were betting that a fresh political face would mean an economic turn around for the country — like hedge fund billionaire Michael Novogratz of Fortress Investment Group — seemed to be getting what they wished for.
But then it all stopped. In September Rousseff started inching ahead of Silva and now has a 7 point lead according to the most recent poll data.
As all this happened, Brazil’s stock market the Bovespa, started to protest. It fell 14%.
As Silva began to lose in the polls, Wall Street started to question the entire recovery narrative. Cantor Fitzgerald called it a “farce” in a recent note.
In part, they reasoned, because change was not really change.
“It does not take much sense of history to appreciate the irony that Ms. Silva is running a reform campaign against a leftist Workers Party candidate, who herself came in under a reform agenda president (Lula). Moreover, Ms. Silva was herself a Workers Party minister from 2003 to 2008 under Lula.”
What’s more, others argued, Silva’s platform may be too ambitious for a country suffering from a recession. On the one hand she wants to maintain the expensive adn expansive social programs that have pulled Brazilians out of poverty and kept unemployment low.
On the other hand Silva also wants to implement reform, tightening monetary policy to stem inflation and simplifying the country’s tax code.
“Reforms were stymied when growth was buoyant,” wrote analysts from London-based Spiro Sovereign Strategy in a recent note. “They will prove doubly difficult to implement when the economy is contracting, the US Federal Reserve is preparing to raise interest rates and China’s economy is slowing markedly.”
Not a lot of good news here.