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Ghiggia bite

10 June 2014 By Rob Cox

At the opening of the Confederations Cup in Brasilia a year ago, President Dilma Rousseff was booed by thousands of soccer fans for all of Brazil to see. It’s easy to understand then why she isn’t planning to speak at Thursday’s opening ceremony of the World Cup. An embarrassing turn as host of Earth’s biggest sporting event – or crushing repeat of the 1950 Maracanaço – may be the greatest obstacle to her clinching a second term.

With each dip in Rousseff’s poll numbers, the Bovespa Index kicks up a notch. Investors are hoping her experimental economic policies will come to an end at the ballot this fall.

With unemployment still low and millions of Brazilians lifted out of poverty over the past decade, however, it will take more than a few lousy economic reports between now and then to ensure Rousseff’s defeat. It will take a truly dreadful showing at the World Cup.

While few Brazilians are openly disparaging the home team, that many are privately reflecting on such an outcome is an indication of the malaise infecting Latin America’s largest economy. Inflation remains stubbornly high, hitting 6.4 percent just last week, gross domestic product growth is sluggish and the government’s finances are in bad shape.

“My bet is that it is so bad that you’re going to see regime change come the October elections,” Michael Novogratz, the principal at Fortress Investment Group, with $63 billion under management, said at the Sohn Investment Conference in May. Rousseff is “praying for the soccer team, like all Brazilians, to maybe give the country a lift and her to get some momentum from it.”

The case against Rousseff’s economic leadership is robust. Flawed design and execution of monetary, industrial and fiscal policies have combined to propel Brazil from the ranks of the anointed emerging growth markets to an economic damp squib. Since the start of 2011, when Rousseff took office, Brazilian stocks have lost about a quarter of their value. The real has fallen nearly as much against the U.S. dollar. Last week, Rousseff attributed the market performance to “an ill mood toward Brazil” – certainly not her administration’s policies.

This explains the inverse correlation between Rousseff’s poll numbers and Brazilian assets. At the beginning of the year, her approval ratings stood above 40 percent. They have drifted steadily downward, touching 34 percent in a poll released on Friday by Datafolha. During this period, the Bovespa, which includes the most liquid stocks on the Sao Paulo stock exchange, has gained more than 15 percent. Tellingly, shares of Petrobras have gained twice as much, including a 5 percent bounce on Friday after the release of the president’s latest approval ratings.

That stands to reason. The energy giant has borne the brunt of Rousseff’s industrial meddling. Though the company, whose board Rousseff used to chair, discovered vast deep-sea reserves in 2007, its crude output has been stagnant since then thanks to a combination of strict limits on foreign control, onerous buy-local requirements and government demands that Petrobras build costly refineries and supply fuel at below-market rates.

On the macroeconomic front, the picture is similarly dismaying. Standard & Poor’s downgraded the country’s credit rating in March to just one notch above junk, citing a “combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the elections, and some weakening in Brazil’s external accounts.” That’s a lot to worry about.

Despite all this, there’s a problem with what Novogratz dubbed the “so bad, it’s good” thesis. What appears clear to hedge fund moguls, credit analysts and economists is far from the minds of the average Brazilian voter. For starters, unemployment is below 5 percent, a stat that would probably secure re-election for any U.S. or European incumbent.

Moreover, since her predecessor and mentor Luiz Inacio Lula da Silva first took over in 2003, some 35 million Brazilians have been lifted from poverty into the middle class. This is still the trump card for the Workers’ Party, especially against Rousseff’s most likely opponent in a runoff, Aecio Neves. The former Minas Gerais governor is the wealthy scion of a leading political family. Painting him as an out-of-touch playboy won’t be difficult.

True, inflation is stubbornly high. But for many Brazilian workers, their paychecks are also going up as a result of the tight labor market and mandated inflation adjustments. Consumer credit, the lifeblood of the growing Brazilian middle class, is slowing but still flowing. Productivity growth is not matching wage inflation, thus storing up problems to come. And the government will struggle to reach its target for a primary surplus without resorting to creative accounting.

All of this can probably be held back until after October. Not so the World Cup. The beautiful game’s quadrennial pinnacle kicks off this week and will run for a month. Brazil’s ability to manage the spectacle, keep protests at bay and, eventually, win on the pitch (as Goldman Sachs and Itaú predict) – and dispel the curse of its 1950 loss in the final at home to Uruguay – will ultimately determine whether Rousseff gets a second chance. Let the games begin.


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