Damaged President

As recently as three months ago, President Dilma Rousseff appeared to be in a strong position to win a second four-year term at an election scheduled for October 2014.  She boasted a fairly high approval rating, her zero-tolerance approach to corruption in her administration had won her a reputation as a leader with integrity, and the main governing PT had made a respectable showing at local elections held in October 2012.

However, a wave of mass protests that gripped the country in June and July has left the president battered, and looking extremely vulnerable to a challenge from a political outsider, or possibly even from someone within her own party.  The unrest has also dealt a blow to investor confidence, in the process reinforcing the negative economic trends that helped to fuel the protests.

A centerpiece of the five-point plan unveiled by Rousseff in a bid to appease the protesters is a proposal to hold a referendum on reform of the dysfunctional political system.  However, the plan has run into a wall of opposition in the Congress that rules out any chance the referendum will be held prior to the 2014 elections.

Other measures approved by the Congress, including the classification of corruption as a serious crime and the dedication of income from oil royalties to the education budget, have helped to restore social calm, but Rousseff’s popular support has plummeted, a development that has fueled speculation that her iconic predecessor, Luíz Inácio “Lula” da Silva, might replace her at the top of the PT ticket in 2014.

Some of Rousseff’s supporters argue that her popularity will rebound now that the protests have subsided.  However, her detractors within the PT, whose numbers are growing, will not give her the benefit of the doubt if her poll numbers do not improve in short order, which is unlikely in the absence of positive economic news over the next few weeks.

Unfortunately for Rousseff, the winds are not blowing in her favor.  Efforts to combat inflation have failed to stem a rise in prices of staple goods, and a combination of uncertainty surrounding US monetary policy and fears that the government might seek to soothe social tensions with populist spending increases has triggered an inflationary depreciation of the local currency.  With all signs pointing to further monetary tightening and the government under pressure to hit its fiscal target by any means necessary, Brazilians are facing a very real risk of a damaging bout of stagflation.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST
REGIMES & PROBABILITIES Center-Left Coalition 45% Divided Government 35% Centrist Coalition 20%
RISK FACTORS CURRENT  
Turmoil Moderate Same SLIGHTLY MORE Same
Investment
  Equity Moderate Same Same SLIGHTLY LESS
Operations High SLIGHTLY LESS Same SLIGHTLY LESS
Taxation Moderate Same Same SLIGHTLY LESS
Repatriation Low Same SLIGHTLY MORE Same
Exchange Moderate Same SLIGHTLY MORE Same
Trade
Tariffs Moderate SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS
Other Barriers Moderate Same Same SLIGHTLY LESS
Payment Delays Moderate Same Same Same
Economic Policy
Expansion Moderate Same SLIGHTLY MORE Same
Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
Foreign Debt High SLIGHTLY LESS Same Same
SUMMARY OF FIVE-YEAR FORECAST
REGIMES & PROBABILITIES Center-Left Coalition 45% Divided Government 35% Centrist Coalition 20%
RISK FACTORS BASE  
Turmoil Moderate Same Same Same
Restrictions
   Investment Moderate SLIGHTLY LESS Same SLIGHTLY LESS
   Trade Moderate Same Same Same
Economic Problems
   Domestic High Same SLIGHTLY MORE Same
International High Same SLIGHTLY MORE Same
* When present, indicates forecast of a new regime

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