Brazil - Economic Briefing August 2002

Confidence Bolstered by New IMF Accord (continued)

Interest rates unlikely to drop amidst uncertain financial markets
Despite prospects for higher inflation, the Central Bank monetary policy committee (COPOM) decided to lower the benchmark SELIC interest rate by 50 basis points to 18.0% on 17 July. Given the turbulence experienced in financial markets and the real weakening, the markets had not expected the monetary easing and voiced concerns that political rather than economic considerations had prompted the Central Bank to act. Even so, participants expect interest rates to come down gradually this year.

Government candidate falls out of second place
The government’s candidate for the October presidential elections, José Serra fell out of second place in opinion polls this July. Until last month, most had expected that the presidential election would come down to a clear cut run-off between Serra and the left-wing Worker’s Party presidential candidate, Luiz Inácio da Silva (‘Lula’). However, July opinion polls show that the presidential election may yet produce surprises. Ex-finance minister and former governor of the north-eastern state of Ceara, Ciro Gomes, has now replaced Serra in second place, with his support increasing from 13.3% in June to 21.4% in July. Gomes is a former member of incumbent president Cardoso's Brazilian Social Democratic Party (PSDB, Partido da Social Democracia Brasileiro) but in 1998 decided to become the presidential candidate for the Popular Socialist Party (PPS, Partido Popular Socialista ex-PCB, Partido Comunista Brasileiro). Even though Gomes’ campaign rhetoric is marked by its left-leaning ideological tone, as finance minister in the Itamar Franco’s government, he managed to build an image of someone who sought to defend the Real Plan and a more liberal economic regime. The PPS candidate’s support has been bolstered by middle-class voters disappointed with the Cardoso government’s economic policy, which is blamed for the decline in the value of the real and hikes in public service and fuel prices. In addition, Gomes criticizes monetary policy for being too tight and the reluctance of the government to subsidise domestic firms in light of increased foreign competition. However, what worries markets most are his statements that Brazil should consider renegotiating and restructuring its public debt. The July boost in opinion polls served to further undermine financial markets that were already suffering from concerns about a possible left-wing Lula victory. Nevertheless, the Gomes rebound may easily reverse in favour of the government candidate if the confidence boost of the IMF accord helps the currency to recover, which would temper inflationary pressures and provide the conditions for the Central Bank to lower interest rates further. The possibility of a pickup in economic activity and lower unemployment may sway voters to favour the status quo.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Brazil.  For more details please click here.

For five-year forecasts, please click here.