Brazil Country Update

( ) Indicates change in rating.                                         * Indicates forecast of a new regime.

Rousseff Signals Shift to the Center
President Dilma Rousseff won a runoff election held in late October with 51.6%, after falling short of a majority in the first-round of voting earlier in the month. The PT-led coalition retained its majorities in both congressional chambers, and the trimming of the number of parties in the governing alliance from 17 to just nine may facilitate the process of steering legislation through the Congress. However, the PT and its main partner, the PMDB, suffered a net loss of 18 seats and 13 seats, respectively, while the PSD confirmed its status as a major player in the legislature, winning 37 seats in the lower house in its first national election. Rousseff will likely need to bargain for the PSD’s support, without which her coalition would come dangerously close to losing its lower-house majority.
The president faces numerous daunting challenges as she prepares for her second term, which will officially begin in January. The economy fell into recession earlier this year, and efforts to stimulate a recovery will be impeded by high inflation, which has prompted the central bank to tighten monetary policy, and limits the scope for using fiscal tools to stimulate growth.
Rousseff’s political difficulties have been compounded by a damaging corruption scandal at Petrobras, the state-owned energy giant. Rousseff has taken a strong stand against corruption in her administration, which should help to limit direct political damage from the scandal. However, the issue could become a distraction from the more important task of reassuring the investors whose confidence will be crucial to fueling an economic recovery.
The markets are waiting for signals of how the president intends to address the dual problems of slow growth and high inflation. In that regard, the appointment of Joaquim Levy to replace Guido Mantega as finance minister is a clear step in the right direction. A former treasury head who more recently worked as head of assets management at Banco Bradesco, Levy has pledged to produce a primary surplus equivalent to 1.2% of GDP next year, a figure that will increase to 2% of GDP in 2016–2017.
Moves by the government to restore fiscal discipline will have a dampening effect on economic activity in the near term, meaning that any significant improvement on this year’s weak growth performance in 2015 will depend on a more favorable climate for exports.

Economic Forecasts for the Three Alternative Regimes

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