The boos that hailed down on Dilma Rousseff last month at the Confederations Cup are growing louder. Approval for the Brazilian president fell 26 percentage points in the last month, from 71 percent in June to 45 percent in July, according to a July 9–12 poll conducted by Instituto Brasileiro de Opinião Pública e Estatística (Public Opinion Research Institute—IBOPE).
But rather than taking a turn toward higher public spending, analysts and economists expect the Brazilian president to instead recalibrate toward more investor-friendly policies that will encourage private infrastructure spending, reverse a trend of rising unemployment, and spur GDP growth.
For observers of Brazil and other emerging economies, today’s social unrest may be the necessary step backward before the market can take two steps forward.
“If there’s one unifying theme that has held together the emerging market economies over the past 10 years, it is that incumbents have been strong and riding this economic cycle,” said Christopher Garman, the Latin America director of Eurasia Group, on July 17 during the Brazilian-American Chamber of Commerce’s mid-year political and economic outlook in New York City. That cycle contributed to today’s average length of incumbency being 7.4 years, he said—twice as long as in 2002.
“What we’re witnessing in Brazil is the end of a political supercycle and the return of economic constraints on politicians,” continued Garman. “As these constraints rise, we’re going to have a return of more constructive policies, both in terms of working more aggressively with the private sector in order to find more ways of boosting investment, and also on a macroeconomic framework.”Some reforms have already begun. Brazil’s government is taking steps toward political changes that would improve electoral transparency and clamp down on corruption, as well as getting its finances in order. As a sign of the urgency, Finance Minister Guido Mantega canceled a mid-July trip to Moscow for a G20 meeting, opting to stay home to focus on domestic financial The government is targeting a budget surplus of 2.3 percent of GDP, up from the current 12-month trailing average of about 2 percent, while also targeting inflation below 6.5 percent, down from the current 6.7 percent.
To date, the moves have not been enough to quell growing public dissatisfaction with Rousseff. A poll released on July 25 by IBOPE put her administration’s approval rating at 31 percent, down from 55 percent in early June. Poll respondents complained about inflation, taxes, corruption, and poor public services—the same complaints that sent millions of middle-class intellectuals into the streets last month to demand lower public transport fares and a crackdown on corruption.
A weak economy is also fueling the protests. Paulo Vieira da Cunha, a former deputy governor of the Central Bank of Brazil, forecasted inflation to average 7 percent to 8 percent this year. Márcio Garcia, of the Pontifícia Universidade Católica do Rio de Janeiro (Pontifical Catholic University of Rio de Janeiro—PUC-Rio), forecasted slightly lower inflation of 6.5 percent and GDP growth of 2.3 percent this year. On the more bearish side, OppenheimerFunds senior analyst Maria Claudia Ribeiro de Castro projected GDP growth no higher than 1 percent.
Rousseff lacks access to any silver bullet, given the government’s slow pace of reform. But panelists at the recent conference agreed that she can make token changes—such as targeting corruption and boosting the credibility of her economic team with a new minister of finance. Other pro-market moves could include a determined pull-back in inflationary spending and the adoption of more investor-friendly policies, such as an accelerated timetable for energy and infrastructure concessions.
During the previous eight years under former President Luiz Inácio Lula da Silva, a booming economy removed macroeconomic constraints that might have dictated political or fiscal reform. Lula’s successor was not so fortunate to be elected in boom times.
“From a market perspective,” said Garman, “the question to ask is: Is this going to lead to larger governance challenges and dysfunctionality and downside risks to investors? Or are we heading into a scenario in which politicians respond constructively and try to regain investor confidence to drive economic growth and deliver on these demands?”
Rousseff will benefit by taking the constructive path of investor-friendly concessions, the panelists agreed. Otherwise, she is likely to hear more boos when she attends next summer’s World Cup—an indicator of what voters will express in the presidential election in October.