By Rory Hammerston, a senior investment manager at Swip Fifty five million Brazilians voted for ...
By Rory Hammerston, a senior investment manager at Swip
Fifty five million Brazilians voted for change. The economic future of the largest country in Latin America will now depend on a leftwing politician who was rejected in three previous presidential elections for his radical anti-capitalist platform.
Even before the second round election on 27 October, the stock market was in sharp recovery mode. The bond market led the rally, having reached a low on 16 October as confidence in a left-wing government reached rock bottom. It only needed a comment from Lula's campaign manager to turn local investors' mood positive.
Emboldened by continued improvements in monthly balance of payments data, the rally spread fast and foreigners, who had been constant sellers during the year, started to buy back into the equity market. Understandably, there has been some profit taking after such quick returns but the question remains whether Brazil can survive another economic crisis.
Brazil has a debt problem, aggravated not only by the foreign currency dependence of the burden but also by its high exposure to interest rates. As confidence in Brazil wanes, the currency tumbles, increasing the stock of debt. The central bank hikes rates to stabilise the currency, increasing the debt burden further.
The solution is obvious. Positive newsflow will lessen investor concern. Capital will return to the country and a stronger currency will stem inflation and allow interest rates to fall.
Economic newsflow has been sensational over the past few months. The current account deficit is moving towards balance, mostly due to a weaker currency, swelling exports. Public sector costs are under control and IMF targets for the year will be easily met. Lula has a tough challenge ahead and recent gains will be lost unless he makes timely decisions. His transition cabinet has yet to be named in full and the names must be credible.
No announcement of the cabinet will surface until the end of November at best. Much has been said about continuity in terms of International Monetary Fund (IMF) agreements and inflation targeting but disagreement over the sale of a non-controlling stake in Banco do Brasil will strike further discord.
Lula's inexperience is a major risk and therefore the calibre of his inner circle is paramount. It is not all bad news, however. He has made necessary and sensible approaches to opposition parties in order to smooth the parliamentary road for the tough fiscal and monetary reforms needed.
Brazilian politics is enormously partisan and alliances are crucial, if tenuous. Short-term positive newsflow is vital. A swathe of provisional measures must be passed before the more serious structural issues can be tackled.
There is nothing inevitable or imminent about Brazil's fortunes. Comparisons with Argentina's demise are unjust, although there is one common thread, that of confidence. Without the confidence of domestic and foreign investors, we are likely to see capital flight spiral. The situation must be managed very carefully and there is little room for heterodox solutions. Lula needs to realise he is no longer a candidate but president elect.
World-class companies at low valuations.
Twin deficit showing improvement.
Local M&A proves corporate confidence.
br> Bear points
Transition risk of incoming government.
Risk-shy market - easily frightened investors.
Inflation needs to be controlled.
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
Fine reduced to £60,000
Two roles created