Brazil: election outlook

1. Brazil: election outlook There is more to this election than meets the eye Christopher Garman Director, Latin America (202) 903 0029 garman@eurasiagroup.net

2. Main conclusions • Dilma Rousseff is the clear favorite, and she is poised to benefit from an overarching congressional majority • (2) There is more at stake in this election than meets the eye • Macroeconomic policy:Differences between Dilma Rousseff and Jose Serra are more narrow than conventional wisdom suggests • Sector specific industrial policy: Very different views on how to develop Brazil’s oil sector, with important repercussions for growth. Outcome will also be important to utilities, telecom and mining.

3. Probability of Victory for Government Candidate Source: Clifford Young and Christopher Garman, “The Unpredictability of Pundits and Predictable Elections: Using public opinion to predict political disputes”, WAPOR, 12 May 2010.

4. Presidential Polling Data

5. Rousseff will grow further with TV time

6. House Election Projections

7. Senate Election Projections

8. Macroeconomic Policy Outlook • Dilma Rousseff • Fiscal Policy: Investors will be pleasantly surprised with Rousseff’s stance on fiscal policy, but disappointed over her ability to follow through—for both structural and non-structural reasons. • Exchange Rate and Monetary policy: Rousseff’s advisors will be more worried about currency appreciation, and makeup of CB board is at play. • Jose Serra • Fiscal Policy: Stronger conviction over the need to curb rising expenditures, and a bit more leeway to follow through. • Exchange Rate and Monetary policy: Risk of interventionist measures on currency probably a bit higher than those in a Rousseff administration (but not by much); pundits overplaying risk to operational autonomy to CB.

9. Differences rest on sector-specific policy

10. Reform Outlook: few macro reforms on the agenda • Dilma Rousseff • Political outlook: Overarching majority, but she will be challenged to manage tensions between the PT and PMDB • More micro than macro reforms: • Microeconomic reform agenda focused on overcoming hurdles to investments • Regulate the 2003 pension reform, and limit to payroll expenditures • Tax reform could be revisited, but more piecemeal • Jose Serra • Political outlook: Smaller majority, but fewer tensions within coalition • The left will have a veto over constitutional reforms: • Tax reform likely to figure as the largest structural reform • Fiscal reform agenda focused on issues that only require simple majorities • Microeconomic reform agenda may get greater push