Brazil: Market Fears Increase with Lula's Rise in Polls

NotiSur - South American Political and Economic Affairs, June 21, 2002 | Go to article overview

Brazil: Market Fears Increase with Lula's Rise in Polls


By Matthew Flynn

[The author writes for Business News Americas in Sao Paulo]

Luiz Inacio Lula da Silva, the presidential candidate of the left-leaning Partido dos Trabalhadores (PT), is running for Brazil's highest post for the fourth consecutive time. In previous elections, he led in the polls only to lose in runoff elections.

In the past, the prospect that the PT might govern Brazil set off nervous tremors in the country's business sectors. When Lula was leading the polls against Fernando Collor de Mello in the 1989 presidential runoff election, Mario Amato, then president of the Sao Paulo state industrial federation (Federacao das Industrias do Estado de Sao Paulo, FIESP), warned that hundreds of thousands of businessmen and women would leave Brazil if the leftist candidate won.

With just four months until Brazil elects a successor to two-term President Fernando Henrique Cardoso, it is not business owners who are threatening to leave but foreign investors.

Lula's recent rise in the polls has increased investor uncertainty because of doubts about how he would carry out economic policy, and it has strained the country's economy already dependent on foreign capital inflows.

By toning down its radical discourse and making alliances with other parties, the PT has the best chance in its more than 20-year history to win the presidency in the Oct. 6 elections. But the government's favored candidate, Jose Serra from the Partido da Social Democracia Brasileira (PSDB), is also hard at work building alliances.

Lula's rise and the decline of investor confidence

After Roseana Sarney, the pre-candidate from the Partido da Frente Liberal (PFL), exited the presidential race following a scandal involving a family business (see NotiSur, 2002-04-05), the electorate appeared to shift toward Lula. He jumped 10 percentage points to go beyond 40% in voter-preference polls in mid-May.

Lula's climb in the polls, combined with sluggish economic growth and increasing worries about the government's fiscal accounts, prompted foreign banks and risk-classification agencies to revise Brazilian investments downward.

Brazil's risk, the premium paid by the Brazilian government and domestic companies to contract foreign loans, jumped from a low of 700 basis points in March to over 1,200 points in early June. The dollar also rose from a low of 2.33 reales in April to over 2.60 reales in early June.

"Regarding Brazil, investors remain concerned that the country's terms on debt could be reorganized if a new administration steers the country in a leftist direction," said rating agency Moody's funds analyst Keith Murray.

The change in investor faith brought harsh reactions from politicians and even from local subsidiaries of multinational banks that downgraded the Brazilian debt. Lula called the actions of multinational banks "economic terrorism."

Foreign analysts defended their move by saying they were just following the market. "They should have looked in their own back yard because, long before the foreign banks made their negative assessments, the domestic markets were signaling a worsening of expectations," said Paulo Vieira da Cunha, a senior economist with Lehman Brothers.

But an interest by foreign banks in profiting from the volatility cannot be ruled out. Morgan Stanley recommended that its investors reduce their Brazilian investments, and, 15 days later, when the price of the country's debt paper fell, recommended their purchase.

Brazil's Finance Minister Pedro Malan called on the presidential candidates to lay out their plans for the economy and their commitment to the reforms undertaken by Cardoso as a way to dispel investor fears.

PT plans to reveal party platform on June 30

As market fears continue, PT leaders are assiduously developing their party platform. Antonio Palocci Filho, who is coordinating Lula's campaign and the party's platform, recently released an initial platform document. …

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