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Dilma's Dilemma
Market Meltdown May Ultimately Save Brazil

A market meltdown following fast on news of Brazilian President Dilma Rousseff’s re-election will have many Brazilians worried, but there’s reason for at least guarded optimism in this sell-off. According to the WSJ, markets were especially anxious after Rousseff’s victory: 

The currency had its worst day in a decade, the country’s stock market fell 3% to a six-month low, and the state-owned energy giant lost more than a tenth of its value, reflecting the challenges Ms. Rousseff now faces over Brazil’s stagnant economy. […]

Brazil’s investment rating may be on the line. Standard & Poor’s in March downgraded the nation’s sovereign-credit rating to one notch above junk, citing slow growth and deteriorating finances. Loss of investment grade would ripple across the economy, raising borrowing costs, cutting demand for goods and leading to a loss of jobs.

When Luiz Inácio Lula da Silva—Rousseff’s predecessor in the Worker Party (PT)—won the presidency in 2002, he inaugurated what would become four terms of PT rule. At the time, investors worried that a socialist government would wreck the economy. But Lula understood some important things: that a bad economic performance would hurt Brazil’s poor most of all and that inflation was his enemy. He was not, and never would be, a Margaret Thatcher figure pushing through painful but salutary reforms. But he was a realistic economic manager.

Over time that discipline eased off. Brazil has enjoyed near ideal conditions through most of his time in office. Commodity prices were high, and Asian buyers were ready to snap up all the food and minerals Brazilians could offer. Brazil is historically a country that only works when it has to. When the going is good, Brazilians ease off, trusting to their huge resource endowment to keep things afloat. Then, when the bad times come (and they always do), Brazil has to scramble to adjust. This cycle is hundreds of years old, and goes back to the colonial era. It’s one reason why Brazil has always (so far) disappointed those who think it’s about to break away from the pack and transition to a first world economy—and why it has also disappointed the pessimists by never quite turning into the basket case they expect.

The real worry now is that the PT, settling into its fourth consecutive term in office—and with the popular Lula poised to run once again when Dilma’s two terms are up—would entrench itself into power forever. Corruption would proliferate, confidence deteriorate, and a cozy relationship between big business and big government would put Brazil to sleep for the long haul.

But the market response to Dilma’s win suggests that she won’t be able to coast through her second term. The world outlook doesn’t favor Brazil all that much. A deflationary global climate is extremely bad for commodity producers like Brazil. Instead of padding the payrolls of state-owned companies and making sweetheart deals with the crony capitalists of Brazil’s very large and very state dependent nexus of status quo corporations, Rousseff will actually have to think about things like economic efficiency. Instead of coasting on a high exchange rate, she may well have to worry about currency depreciation igniting domestic inflation (especially if the Fed starts to raise rates). Instead of swimming in a sea of excess capital, Brazil will have to work to attract and keep foreign investment.

Rousseff is anything but stupid. She can read the signs of the times very well. Brazil needs good governance right now rather than governance that feels good. The markets know this. They, one hopes, won’t let her take her eye off the ball.

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  • George Armstrong Custer

    Pie in the sky, gibberish analysis and wishful thinking.
    Dilma is a committed ideologue who said what she had to say in order to win the election. She not only doesn’t understand markets she is ideologically opposed to them. Often described as a “technocrat”, Dilma has no experience or training in anything. She is very close to the Cuban communists and was present this January when the first stage in a nearly $1 billion port was opened in Cuba – financed by the Brazilian government. There are other Brazilian government projects in Cuba but Dilma recently classified all information abut them until 2027.
    And you think this ideologue is going to shift to the right? If you believe that then you’ll buy a bridge in Brooklyn.

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