BY CHRONICLE STAFF
After president Luiz Inacio Lula da Silva from the leftist PT party failed to win the first round of Brazil's presidential elections on Sunday, there is growing speculation that his rival, Geraldo Alckmin from the social democrat PSDB party will win the second round.
"A few weeks ago, Alckmin had zero chance of winning the election," Walter Molano, head of research at BCP Securities, wrote in a commentary today. "Now, it is a growing probability."
Most analysts believe that Geraldo Alckmin will absorb the opposition votes that went against Lula, along with a steady erosion of Lula supporters, he says.
"Time is a liability for Lula," Molano argues. "Each day, new information is leaked. New scandals hit the headlines, and more voters defect."
Credit Suisse also predicted growing support for Alckmin. "Although it will not be very easy for Alckmin to turn this firstround result around, we think the final result has become a close call," the bank said on Monday.
And while Alckmin managed to get surprisingly strong support, his party fared even better at the governor elections. The alliance of PSDB and PFL got five governors, including the key Sao Paulo and Minas Gerais states, while the PT only got four. The PSDB PFL alliance got 36.2 percent of the total vote at the governor elections, versus 10.1 percent for PT, Credit Suisse points out.
The results were good news for investors, who had widely expected Lula to win the first round.
"We believe market participants will take this result as favorable, as there is some perception among market players that the probability of important structural reforms being approved would be higher in a PSDB government than in a second-term PT government," Credit Suisse said in its analysis.
While Lula has won praise for providing macro-economic stability, he has failed to boost growth as much as most economists say the country needs. Meanwhile, Brazil's competitiveness is declining On the latest global competitiveness ranking from the World Economic Forum, Brazil fell nine places to 66th place. (See Argentina Less Competitive).
At the same time, a growing corruption scandal has hit the PT party since June 2005 and undermined the Lula administration. Fresh corruption charges before the Sunday election played a key role in reducing support for Lula, experts say.
Alckmin, a widely respected former governor of Sao Paulo state, has pledged to cut taxes, red tape and the size of the state, while boosting international trade and forging closer ties with the United States. In a recent interview he also lashed out at the corruption scandals. (See Geraldo Alckmin: More Trade Negotiations).
NO REFORM MANDATE
However, Fitch rating agency warns that whoever wins the presidential elections may not have the necessary mandate to implement reforms.
"Whether Alckmin or Lula wins in the second round, next president will have great difficulty forging a reform coalition," Roger Scher, head of Latin American sovereign ratings at Fitch, said in a statement Wednesday.
Fitch last upgraded Brazil's sovereign ratings (long-term foreign and local currency Issuer Default Ratings [IDR]) to 'BB' from 'BB-' in June, reflecting the improvement in the country's external finances, especially the sharp reduction in the public sector's external exposure. But uncertain prospects in the next government for the passage of a pro-growth reform agenda, as well as likely pressures to loosen macroeconomic policies, could slow improvement in Brazil's sovereign creditworthiness, the ratings agency warned.
All eyes are now on the centrist PMDB party, which managed to get the largest number of seats in the lower house of the Brazilian congress. The PT got 223 seats and the PSDB alliance got 193 seats.
"Not currently affiliated with either the government or the opposition, the PMDB could be the key to governing Brazil in the next four years," Fitch says.
A new electoral rule (the 'minimum barrier clause') will further compliucate matters, since it will penalize parties that failed to meet a minimum threshold of votes, making existing coalitions untenable, the ratings agency says.
"Hence, either Alckmin or Lula as president will not only have to lure the PMDB party into a coalition, but will have to appeal to opposition parties to obtain the votes of 60 percent of both chambers necessary to reform the constitution," Fitch says.
Brazil's constitution regulates minute aspects of public policy, necessitating constitutional amendments for ordinary economic reforms.
"In order to maintain the current level of taxation and ensure spending flexibility, constitutional amendments extending the term of the CPMF financial transactions tax and the DRU de-earmarking provision, both of which expire in 2007, will be needed," Scher says.
Fitch's upgrade of Brazil's sovereign ratings reflected not only improved external finances, but also the assumption that the country's sound macroeconomic policy settings would continue into the next administration.
"Over the longer term, however, good macro policies are not enough," Scher says. "Pro-growth reforms are the only way to get Brazil's heavy government debt burden, which stands at 70-75 percentof GDP, on a clear downward path. And that is the only way for Brazil to experience marked improvement in sovereign creditworthiness."
Reforms that would improve growth prospects and public debt dynamics include formal central bank independence; social security reform; a more pro-business tax regime and ultimately a lower tax burden; permanent de-earmarking of revenues and broad spending control; labor reform easing restrictions on hiring and firing; microeconomic reforms and policies promoting infrastructure investment; and reforms encouraging financial sector competition, Fitch says.