Brazilians will be watching closely as the direction that the government takes will be revealed. Will it be a new Dilma government, or more of the same?

Political Prospects

Despite Dilma Rousseff winning re-election, her winning margin was only 3% – the lowest margin for the PT, the ruling left-wing Workers’ Party, since Lula was elected in 2002 with a winning margin greater than 20%. Although the PT-led coalition remains in control of Congress, the party lost 18 seats in the House. In proportional terms, the largest parties (PT, PMDB, and PSDB) lost ground with the smaller parties gaining. In 2015, we will see a more polarized Congress, represented by 28 different parties.

Whilst Dilma emerges a weakened president from the elections, the opposition has gained ground. Aecio Neves, leader of the PSDB, centre-right wing opposition party and presidential candidate standing against Dilma, received more votes than Fernando Henrique Cardoso, Geraldo Alckmin or Jose Serra ever did, with the PSDB successfully mobilizing supporters in similar proportions to its adversary. This suggests that the PT will face real political opposition for the first time since 2002. It will be increasingly hard for president Dilma to enact the reforms in the manner in which her and her party desire, particularly due to unravelling events post-election – such events include congress voting down the president’s bill which called for political reform via plebiscite.

Furthermore, it is clear that the PT will attempt to re-invent itself before the 2018 elections. The party emerged bruised and wounded from the re-election, and this appears to be Lula’s top priority in the upcoming years. Many Brazilians have criticised Aecio for losing his home state, Minas Gerais, whilst not highlighting that the PT lost in Sao Paulo, Lula’s home state, and in Rio Grande do Sul, Dilma’s home state. This is telling – and the rhetoric the PT adopted throughout the campaign shows a shift left from the centre in an attempt to appease core voters. It is worth recalling that Lula won in 2002 after three unsuccessful attempts at running for the presidency, having adopted a more pragmatic and business friendly approach and a move towards the centre. After openly criticising “the bankers” and accusing her adversaries of favouring their interests over those of the “middle class,” Dilma and the PT will have to work hard to regain the trust of the business sector.

Economic Prospects

Brazilians are nostalgic of the country’s growth period between 2004 – 2010 during which growth averaged 4.5 per cent annually. Comparatively, economic growth now stands at less than 1%. Fiscal policy is at the heart of Brazil’s current stagnant growth. The consecutive mishandling of fiscal balances has left the country with a government expenditure close to 40% of GDP, partly due to wasteful public spending. This may lead the government to take steps to mitigate this situation over the next few months. Government will inevitably be divided over which policies should be implemented to contain public expenditure and boost growth. Subject to the approach Dilma decides to take, there may be different policy implications. A more conciliatory administration, and particularly a market-friendly minister of finance, may help to calm an ever impatient business sector.
However, many think that the government will continue with ‘more of the same’, which would impede any movement towards economic orthodoxy. Regardless, the era of so-called “creative accounting” to meet fiscal targets – which dilutes the veracity of fiscal results – is likely to end as voters become increasingly troubled by the elusive ‘transparency’ of public finances, both in terms of credibility and corruption.

Inflation has exceeded Brazil’s upper-target limit of 6.5 per cent and the Central Bank has raised the benchmark SELIC interest rate to its highest level in three years. The outgoing Central Bank governor, Alexandre Tombini, has been fast to blame a strong dollar and high commodity prices. However, many economists believe that other factors are also at play such as: the availability of easy credit, state-owned oil company Petrobras’ price readjustment, and an unproductive Brazilian labour force. Dilma has done what she can over her first term to keep prices down, reduction in fares and taxes; but this did not stop the further hike in inflation.

Given this outlook, a gradual approach to restoring inflation to its targeted 4.5 per cent will be challenging. Once a new cabinet is announced it will instil more confidence into the market and, assuming the market acts favourably, it will limit further economic turbulence. If they were to pursue a policy which targets inflation and a free-floating exchange rate, it would strengthen the macroeconomic foundations of Brazil and pave the way for an eventual containment of inflation in the long-term.

Brazil must also address its infrastructure deficit, which in combination with what is known as the “custo Brasil” (Brazilian cost), excessive red tape and high inflation, makes investments costly. During Dilma’s victory speech, she signalled a plan to encourage more investment in the industrial and infrastructure sectors. Currently, only 2.45% of GDP is made up of public investment in Brazilian infrastructure, with the large majority coming from the private sector. If Dilma were to make a serious commitment to this sector through investment and simplification of the institutional framework, it would demonstrate willingness for dialogue with a sector of the economy that she has previously had a tenuous relationship with.

Social Prospects

In spite of the situation described above, the fact that Dilma was able to win an election in a lackluster economic environment suggests that the economy may not be of principal importance to many voters; it also demonstrates the talent of Joao Santana, her marketer. The PSDB focused primarily on the country’s economic situation and its bleak economic prospects, but failed to translate this message to the electorate. The slowdown in growth that Aecio repeatedly referred to has yet to affect the average voter.

The Brazilian government boasts that it was responsible for lifting 40 million people out of poverty and placed them in the middle class. Whilst this achievement is admirable, the poor and emerging, yet indebted, middle class are in danger of falling back into poverty if economic growth is not sustained. According to the World Bank, conditional cash transfer programs, such as Bolsa Familia, only account for 20% of the change in the country’s poverty level during the past decade. The primary factors driving the improvement in social conditions were economic growth and education.

In the next six months, if inflationary issues continue it is probable that the minimum wage, which is indexed to inflation and economic growth, will fail to keep increasing and a larger portion of the Brazilian population will start to feel some economic discomfort.

Looking forward

After a divisive campaign, Brazilians are hopeful that the president’s efforts towards dialogue are sincere and that she will be successful in reuniting the country. Many also hope that, given the tougher economic and political environment that Brazil is facing, the re-elected president manages to re-establish the credibility of her government.

By James Maltz and Maria Beatriz Coelho