“The best argument against democracy is a five minute conversation with the average voter”
– Winston Churchill
It’s not a view widely held and even less in evidence, but we believe that Dilma Rousseff deserves a lot of sympathy from the Brazilian electorate. Seven months into her second term, during which time the global environment for emerging markets has softened quite rapidly, the irony is that this technocrat ‘gets it’, and is making many of the tough financial decisions that investors demanded during much of her first term in office and which will accelerate a return to growth for the country.
The economic plan put in place by Finance Minister, Joaquim Levy and endorsed by President Rousseff is a twin-track affair; improve the business climate while reining in expenditure through an unpopular but necessary bout of fiscal austerity. The target will be a return to growth in 2016. Support has come from ratings agency Moody’s, which last week maintained its investment grade rating on the country, believing signs of a tangible recovery will be achieved by the end of 2016.
Austerity is never welcome, especially in a country that had got used to a decade’s worth of commodity fuelled government largesse. It was on the promise of more of the same that Rousseff was re-elected less than a year ago. Yet, seven months into her new administration, her personal popularity is at historic lows, there are unrealistic calls for her to be impeached and Sunday, August 16th saw a series of nation-wide demonstrations. This is a mistake; voter dissatisfaction is based on flawed data and little comprehension of how more difficult economic conditions overseas are. Global economic growth in the 1H of 2015 has been a mere 2%, comparably the weakest since 2009, while industrial production and world trade have also been flat, possible harbingers (or at least they have been in the past) of a recession.
Rousseff is the head of a coalition government and a party that has already been in power for 13 years and so now, when hard choices need to be made, her low standing in the polls provides a useful conduit for coalition partners in the Senate unwilling to be associated with economically austere but investor friendly decisions that will return the country to speedy growth. She needs support (if not consensus) to push through the economic reform adjustments devised by finance minister Levy but so far, it isn’t forthcoming. Rousseff’s notional allies in the lower house of Congress, the Democratic Movement Party (PMDB) are refusing to co-operate. While key legislation necessary to close the fiscal gap are being delayed, more populist ones such as doubling the savings rates for funds used to supply low cost housing and diluting a proposed hike in payroll taxes find their way through.
There is a certain irony that the business and investment community currently find themselves on the same side as Rousseff. They realize that the work Levy has put into realigning the economy, supported by the President, needs time to be effective. Part of that process necessitates economic and political stability. There isn’t much Brazil or Rousseff can do to revive the economic fortunes for China where a series of bubbles (debt, real estate, the stock market) and faltering growth (though the economy is notionally growing at the government’s mandated annual 7%, independent bottom up analysis suggests the figure is closer to 5%) and she can hardly be blamed for the boom-bust commodity demand and price oscillations.
Rousseff’s support for Levy seems unwavering and visa-versa. This is encouraging and increases the chances that the medicine will work. Brazil has been one of the first major economies forced to get to grips with a slowdown for emerging markets – moves underway increase the chances that it will be one of the first out.