SAO PAULO (Reuters) – President Dilma Rousseff’s narrow re-election victory met with cold reality yesterday as Brazil’s financial markets tumbled on doubts that she can restore confidence in the economy and maintain political support in a sharply divided nation.
Rousseff overcame dissatisfaction with a sluggish economy and poor public services to clinch a second term on Sunday by a slim margin, dashing the hopes of investors and nearly half the electorate who bet on her pro-business challenger.
Finance Minister Guido Mantega, whose replacement is the focus of intense speculation, tried to beat back the pessimism with promises to control inflation and close a budget deficit in the four years ahead, although he added that the election showed popular approval for Rousseff’s economic policies.
Brazil’s currency, the real, extended losses after Mantega’s comments, closing at 2.52 per dollar, its weakest level since April 2005.
Rousseff said last month that Mantega would step down at the end of the year, and government sources say her short list of potential replacements includes a businessman, a former finance ministry official and her current chief of staff.
Whoever takes the reins at the finance ministry, investors are skeptical that Rousseff can pull off a swift recovery, or make a dramatic shift toward market-friendly polices, after four years of ineffective industrial measures.
She now faces the challenge of delivering on campaign promises to expand social benefits for the poor while balancing a strained federal budget.
Major state-run companies whose profits have suffered under Rousseff plunged in yesterday’s trading, including a more than 12 per cent drop for scandal-plagued oil giant Petrobras, its biggest one-day decrease in nearly six years.
The benchmark Bovespa stock index fell 5 per cent early in the day and closed 2.72 per cent lower.
Fitch Ratings, which still rates Brazil’s debt two levels into investment grade, said yesterday that it continues to evaluate Rousseff’s ability to revive growth and pursue less interventionist policies.
Rousseff “will face a challenging economic environment, highlighting the need for policy adjustments to address some of the macroeconomic imbalances that have emerged,” Shelly Shetty, Fitch’s senior director for Latin America, said in a note.
Investors hope a more market-friendly finance minister can help restore fiscal discipline, bring transparency to the federal budget and better engage with business leaders. Some believe that Rousseff will be forced by economic realities to soften some of her interventionist policies.
Announcements of new cabinet members are unlikely in coming days, presidential aides said, as Rousseff rests after a demanding campaign that went down to a photo finish.
Still, she already faces pressure from her own party to choose a finance minister, who if not from the party, is at least aligned with longstanding party thinking.
“We always prefer a party member,” Rui Falcao, the Workers’ Party president, told reporters yesterday. “But what’s essential is that the general lines of economic policy, as they have been practiced, are maintained.”
Speaking to a relieved crowd of supporters on Sunday night, Rousseff struggled to raise her voice as she acknowledged the call for change expressed by many voters in remarks that some observers hoped were a sign of a shift to the centre.
“I know that I am being sent back to the presidency to make the big changes that Brazilian society demands,” she said after winning the runoff with 51.6 per cent of the votes. “I want to be a much better president than I have been until now.”
Her slim, three-point margin over centrist candidate Aecio Neves came largely thanks to gains against inequality and poverty since the Workers’ Party first came to power in 2003.
Using the fruits of a commodity-fuelled economic boom in the last decade, Brazil’s government expanded welfare programmes that helped lift more than 40 million people from poverty despite the current economic woes.
The “Brazilian model” has been adopted by centre-left parties across Latin America and Rousseff’s victory, however narrow, is a blow for conservatives in the region.
It also means there will be no dramatic improvement in ties with the United States, hit in recent years by trade disputes and US government spying programmes that infuriated Rousseff.
About 40 per cent of Brazil’s 200 million people live in households earning less than $700 a month, and it was their overwhelming support that gave Rousseff victory on Sunday.