Event

Eduardo Campos, the presidential candidate of the Brazilian Socialist Party (PSB), was killed in an aeroplane crash near the city of Santos on 13 August. The tragedy may crucially influence the outcome of the general election in October, not least because the PSB ticket will now be headed by Marina Silva, a popular former senator and environment minister. Recent polls put her ahead of Aécio Neves of the centre- right Brazilian Social Democracy Party (PSDB) and suggest that she may even beat incumbent Dilma Rousseff of the Workers’ Party (PT). Such projections to a large extent reflect Silva’s anti-establishment appeal to the many Brazilians that are disenchanted with traditional politics and the sorrow state of the economy. High inflation, a main driver of last year’s mass protests, remains a concern and according to the latest data, the economy entered into recession owing to falling industrial output and weak investment. Though employment and private consumption have held up better, the lacklustre economic performance clearly boosts opposition chances.

Impact on country risk

While the ballot outcome has become more uncertain in recent weeks, Dilma’s re-election bid is not yet on the ropes. The PT has the unconditional support of many of those that have been lifted out of poverty under its rule, and its campaign machine is unmatched. Moreover, support for Silva may wane along with voter sympathy following Campos’ tragic passing, and as her propositions regarding the economy (she has admitted to knowing little of economics) and ‘new politics’ (she may have trouble in forming a governing coalition) face increasing scrutiny. Whoever wins, it is clear that fixing the ailing economy will be a priority for the new administration. In particular, underpinning growth and public finances (thus mitigating medium term political risk) will require boosting competitiveness and investor confidence. To this end, a renewed adherence to the macro-economic ‘tripod’ of credible inflation targeting, fiscal restraint and a flexible exchange rate would be a key step in the right direction. With Silva and especially Neves considered less interventionist than the incumbent, this prospect seems rather more likely in case of an opposition victory than should Dilma secure a second term.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com