Lula not reelected -- Not good for emerging markets

October 4, 2006

President Luiz Inacio Lula da Silva failed to secure a first-round election victory in the October 1 Brazilian Presidential election. He needed over 50%, and received 48.6%. He will now need to campaign against the second runner-up, former Sao Paulo Governor Geraldo Alckmin until the run-off election, scheduled for October 29, 2006.

What It Means:
According to the State Department, Brazil is one of the largest and most influential of the Latin American countries. Brazil led in the creation of:

• Mercosur,
• The Free Trade Area of the Americas (FTAA),
• The Group of 20 (G-20) coalition that represents developing countries' interests in the Doha Development Round of the World Trade Organization (WTO) negotiations.

As a result of its leadership role, Brazil meets regularly in working sessions with the United States on trade and other issues.

When elected in 2002, Lula made economic growth his top priority. As a result, he has successfully guided the Brazilian economy to its healthiest condition in 20 years. GDP growth is projected by the International Monetary Fund (IMF) to be 3.5% in 2006, inflation is down to 4.5% and the current account surplus is $11.1 billion. Last year, Brazil paid off their IMF loan early.

However, many of the ensuing economic benefits have gone to the higher classes, and Brazil’s economy still has some fundamental flaws that need correcting.

• The public sector needs to be streamlined, which would also allow public debt to be further lowered without losing services.
• Education needs to be both more of a priority and more evenly distributed.

Furthermore, Lula’s administration has been caught in two major corruption scandals.

Whether his opponent, Geraldo Alckmin, could do better for Brazil’s economy is doubtful. Alckmin primarily campaigned on his clean, though uninspiring, image as the Governor of the prosperous Sao Paulo state for five years. He prescribes the tighter government spending and lower taxes that are needed, but is not popular with the majority of Brazil’s lower income voters. He does not have the experience that would prove whether he has the political chops to implement his policies.

The next month will show whether Sunday’s vote was a signal for a new leadership, or just a temporary frustration with the ever-popular Lula.

Action Steps:
If you have Latin American funds, hold them for now. If not, hold off buying any new ones until the results of the Brazilian election next month.

Source:
International Monetary Fund (IMF) web site, Voice of America web site, State Dept. web site