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Luis Inácio da Silva (‘Lula’), the
candidate for the left-wing Brazilian Workers’ Party, won easily over the
governing party’s candidate José Serra,. Lula now faces the formidable
political challenge of consolidating his electoral alliance of diverging
political forces to form a working majority. in the legislature Meanwhile,
the deterioration in the currency has raised inflationary expectations and
corresponding interest rate hikes threaten to stave off the nascent
economic rebound. |
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Lula
wins presidency overwhelmingly
On 27 October, Luis Inácio da Silva (‘Lula’) from the Brazilian Worker’s
Party (PT, Partido dos Trabalhadores) won a clear victory in the second
round run-off election over his challenger José Serra, from the incumbent
president Cardoso's Brazilian Social Democratic Party (PSDB, Partido da
Social Democracia Brasileiro). As most polls just prior to the election
had indicated, Lula won by a comfortable majority of 61.3% of the vote to
Serra’s 38.7%. The president has not yet appointed any members of his
cabinet as negotiations to forge a legislative majority are likely to
evolve around doling out posts in the incoming administration to new
allies. The new president will face a formidable challenge of reconciling
diverging interests within his current coalition, which consists of
parties strongly in support of Lula’s reiterated commitment to orthodox
economic policy and supporters of historically advocated leftist agenda.
The incoming president is anticipated to abide by promises to maintain
fiscal discipline, preserve price stability and comply with contractual
obligations. Nevertheless, on the fiscal front the new government is
likely to reorder priorities by pushing for a larger public sector minimum
wage increase than envisioned in the current budget, while simultaneously
pushing for maintenance rather than lowering of current income tax rates.
Inflationary expectations rise as currency weakening to prompt price
adjustments
The accelerated real depreciation and rising international oil prices are
beginning to pass through to domestic prices. In October, the National
Statistical Office (IBGE) reported that the mid-October consumer price
index (IBGE-IPCA 15), which covers monthly price increases up to the 15th
of every month, rose 0.6% over September. The October data came in on par
with the September increase. The annual inflation rate rose to 7.7% in
October from 7.5% in September. Furthermore, the accumulated inflation
rate rose to 6.1%, which is now above the 6.0% Central Bank target for
this year. Consequently, monetary authorities are likely to overshoot the
inflation target for this year. Participants believe that the recent
currency shocks are likely to be more permanent than anticipated earlier,
which may have a more lasting effect on inflation. Following further
deterioration in October prior to the elections - which had brought the
real close to the 4.00 reais to the US$ threshold – the real strengthened
significantly following the election. By the end of October, the currency
had recovered 6.9% and rebounded an additional 3.3% by 8 November. Despite
the recent strengthening, the Consensus now expects the real to end the
year 10.4% weaker than anticipated last month. Similarly, the forecast for
2003 has been adjusted.
On 1 November, the state-owned oil company Petróleo Brasileiro S.A. (Petrobras)
announced its intention to raise fuel prices, including gasoline prices
(+12%) and cooking gas prices (+17%). While the cooking gas price hike is
roughly in line with assumptions in the October COMPOM report, gasoline
prices were hiked well beyond the 9% anticipated by monetary officials.
Officials claimed that the recent strengthening of the US$ and higher
international oil prices warranted the move. Fuel prices account for
approximately 6% of the benchmark consumer price index (IBGE-IPCA), which
is anticipated to experience a more pronounced upward jolt in November. As
a result of rising inflationary expectations, monetary officials are
anticipated to maintain interest rates at their current levels through the
end of the year. Participants do not expect inflationary pressures to
abate significantly through the end of the year. In fact, the forecast for
the annual inflation rate has been revised 1.2 percentage points upward
from last month to 8.1%, which is now also well above the Central Bank’s
6.0% target for this year. Despite some moderation in exchange rate
volatility next year, participants expect inflationary pressures to mount
strongly, as annual inflation is now seen rising. The strong upward
revision reflects the fact that retailers are likely to pass-through this
year’s exchange rate weakening to consumer prices, as weak domestic demand
has so far averted a stronger rise in inflation this year. The Consensus
now substantially not only exceeds the monetary authorities’ central
target of 4% but even the upper end of the +/- 2.5% band.
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