December 26, 2014
Silva winning over investors in election battle
PSB candidate emerges as finance sector’s best shot as gov’t policies fail to impressRIO DE JANEIRO — Investors are warming up to a possible victory by Marina Silva in Brazil’s presidential election as the popular politician emerges as their best shot at avoiding four more years of a government they strongly dislike.
Disdain for President Dilma Rousseff’s leftist policies runs so deep in Brazilian financial markets that one comment making the rounds there says: “Marina is like Russian roulette, but Dilma is like a fully-loaded revolver.”
It captures the mistrust that many investors feel toward Silva, whose history of volatile decisions, lack of executive experience and emphasis on eco-friendly policies, even at the possible expense of economic growth, have all raised red flags.
But a recent rally in Brazilian assets suggests that, at least for now, investors are looking past their misgivings.
Stocks are up 10 percent over the past two weeks, including a more than two percent rise on Wednesday, as Silva surges in the race for the October 5 election.
Silva leads in polls
Opinion polls released on Tuesday night and Wednesday morning show Silva with a significant lead over Rousseff in the event of a second-round runoff on October 26, which now seems certain.
A physically frail figure who grew up poor in the Amazon, learned to read only as a teenager, and combines evangelical Christianity with a fervent following among Facebook-savvy, educated urban youth, Silva’s contradictions can be bewildering even to Brazilians, let alone investors on Wall Street.
Yet, since formally entering the presidential race last week following the death of her Brazilian Socialist Party’s previous candidate in a plane crash, Silva has earned comparisons to other global leaders who recently rode a youth-driven desire for change to victory.
Ilan Solot, a strategist at Brown Brothers Harriman in London, compared Silva to Indian Prime Minister Narendra Modi, who won election this year in another major emerging market that, like Brazil, has seen economic growth slow sharply.
“Not only do we think she has a very high chance of winning the elections — say, greater than 50 percent chance — but we also believe that a Silva government would be very positive for Brazil, both for markets and for the country as a whole,‘ Solot said.
To be sure, Brazil’s presidential race is only now reaching its boiling-point with the debut of campaign ads on TV, which are free in Brazil and parcelled out according to parties’ size in Congress.
The airwaves will thus be dominated by Rousseff and Senator Aécio Neves, who are backed by larger coalitions than Silva’s. That gives them a good opportunity to claw back support following Siva’s surge.
Delegating economic policy
Rousseff still has a strong base of support in Brazil’s impoverished northeast, where her government’s social programmes are very popular.
Yet nowhere is antipathy toward Rousseff greater than in the country’s financial capital, Sao Paulo, where investors are tired of sustaining heavy losses since she took over in 2011.
Since then, Brazil’s economy has grown less than two percent a year on average, and the real has lost 26 percent.
The benchmark Bovespa stock index plunged 35 percent through last March, when it started recovering on bets that either Rousseff would be less interventionist in a second term or that whoever replaces her would be more business-friendly. Even now, it is down about 12 percent during her presidency.
Of the three main candidates, most financial investors still seem to prefer Neves.
A seasoned politician from a business-friendly party with much governing experience, he is considered the safest alternative to ensure economic stability while luring private investment back into the country.
Yet recent polls have shown Silva with a solid grip on second place for the October 5 vote, which would put her into the runoff against Rousseff.
Since entering the race, Silva has worked to cast herself as a reformist, pro-market figure whose policies, if elected, would not be much different from Neves’.
Her team of experts includes respected Brazilian economist Eduardo Giannetti da Fonseca and sociologist Neca Setubal, one of the heirs to Itau Unibanco SA, Brazil’s largest private-sector bank.
“The fact that Silva brings with her advisors of (that) calibre... gives markets a lot of comfort,” said Marcelo Salomon, an emerging markets analyst with Barclays in New York. “I’m giving a vote of confidence to Marina Silva.”
Given her strong team, Silva also seems likely to steer clear of what investors see as one of Rousseff’s main pitfalls — the desire to constantly intervene in the economy.
Rousseff has alternately raised and lowered taxes while also making policy decisions that caused huge losses for state-run oil company Petroleo Brasileiro SA and others.
“(Silva) passes the message that she would be the country’s president and not its chief economist,” said Eric Fine, emerging market debt portfolio manager at Vaneck, a New York-based money manager with US$33.8 billion in assets.
Fine said he is currently avoiding Brazilian assets that suffer from “policy uncertainty,” such as government debt.
At a recent meeting with bankers in Sao Paulo, Silva reportedly said that, if elected, she would mostly delegate economic policy to advisers and focus on other issues that interest her more, such as environmental policy, poverty reduction and anti-corruption efforts.
“I’m not going to try to manage something I don’t understand,” one banker present quoted her as saying.
‘Leap in the dark’
Giannetti da Fonseca has said Silva would restore a government commitment with fiscal discipline, inflation targets, and a free-floating exchange rate — the “tripod” of economic policies first adopted by former president Fernando Henrique Cardoso, of Neves’ PSDB party.
Given the similarities between the economic platforms of Silva and Neves, a PSDB source told reporters last week that the party would support her if Neves fails to make the runoff.
Still, some investors and analysts warn that a Silva government could be a leap in the dark.
They fear her reputation for inflexiblity could be a problem, especially since her own thin party support would force her to work with bigger, more established parties in order to move needed legislation through Congress.
She would also likely face an adverse economic scenario of low growth, high inflation and current account deficits upon taking office in early 2015.
“I don’t think markets think she will be worse than Dilma. But because of Brazil’s economic problems, the situation may require someone who’s more tested,” said Vaneck’s Fine.