Forget the Scottish referendum - this is 2014’s most important vote
Brazil is in the throes of a tense presidential election campaign. James McKeigue looks at what the result could mean for investors.
Sorry. I know that for people in the UK, the Scottish referendum has been the most important political event of the year.
But for those of us interested in Latin America, there's a far more important electiontaking place.
In under a fortnight, Brazil, the region's biggest economy and home to 200 million people, goes to the polls for a presidential election.
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Dilma Rousseff, the incumbent president and leader of the left-wing Brazilian party Partido dos Trabalhadore, is struggling. Over the last few years, dissatisfaction with her government's miserable economic record has started to chip away at her support. Despite this, the lack of decent opposition meant that she was still seen as a shoo-in.
At least, that was the case until recently when a plane crash killed her main opponent.
Call me a cynic but I reckon that, privately, most politicians probably wouldn't be too upset if their chief competition was suddenly removed from the race. Despite the platitudes, I'm sure most of the Westminster establishment are glad to finally see the back of the very capable Alex Salmond.
But unfortunately for Rousseff, her rival has been replaced by a much more charismatic candidate. Indeed, since being named as the new contender, Marina Silva has stormed through the polls and looks a favourite to win on 5 October.
This presidential race will have a huge impact on our investments in Latin America so it's worth taking a closer look.
What's the best result for New World readers?
In politics, a great backstory can help you connect with the voters and both of the main presidential candidates have them in Brazil.
Rousseff was a left-wing guerrilla who was caught and tortured by the Brazilian regime in the 1970s. Whether you agree with her politics or not, you can see why her long-running political activism has struck a chord with the electorate.
Marina Silva also has a moving background.
As a child, she worked as a tapper', collecting latex from rubber trees in the plantations in the north of Brazil.
Too poor to receive schooling, she only learned to read and write at the age of 16. Since then, she almost became a nun, worked with local communities to fight loggers in the Amazon and served as environment minister all of which have helped her build up important support bases in the electorate.
Both Silva and Rousseff are strong candidates. And depending on who wins the upcoming election, Brazil could be a much more exciting place for investors in two weeks' time.
This election is a major turning point for Brazil
"It's the economy stupid!"
I've grown to hate that phrase. It seems to get rolled out at every election. Maybe we're just more materialistic now, but one of the key factors in the Brazilian election is the economy.
Since Rousseff came to power, there have been considerable problems with the Brazilian economy.
To get a clear picture, we need to look back to Rousseff's predecessor Lula da Silva, who won the presidential election in 2002.
In the run-up to the 2002 election, Lula scared the elite with his campaign of socialist rhetoric. Yet, when he came to power, he managed to combine a progressive agenda with pro-growth policies. The economy boomed, while a massive system of wealth transfer helped around 50 million Brazilians climb out of poverty.
Unsurprisingly, he was pretty popular with the voters.
By the time the election came in 2010, he was not able to stand for a third consecutive term, so in his place, he put his protg, Rousseff.
And that's when the problems started.
Brazil is caught in a downward spiral
Soon after Rousseff came to power, the Brazilian economy stalled, with GDP growth going from 7.5% in 2010 to the current recession.
Meanwhile, discontent grew about the country's endless corruption scandals, the government's seeming preference for vanity projects such as the World Cup rather than public services, and increased state meddling in the private sector.
Of course, not all of this is Rousseff's fault.
After all, it was Lula that applied for the World Cup, and his administration engaged in just as much corruption and meddling as hers has.
And as for his economic miracle, in hindsight, that was largely down to a commodity price boom rather than shrewd policy-making.
But while the economy was booming, most of the country was happy to ignore those traits. It's only now, with the economy mired in recession, that the criticisms have become more vocal.
To be fair to Rousseff, she knows all of this. For the last few years, she has been desperately trying to kickstart the Brazilian economy. But to no avail. The government's initial response was a classic combination of monetary and fiscal easing. But these pro-growth' policies failed to work.
"These policies help stoke demand, but Brazil's problem was supply", explains Nomura analyst Tony Volpon. "Its manufacturers are uncompetitive, so all the extra demand created just boosted imports."
And that has led to a worsening current account deficit. Indeed, credit ratings agencies are so worried about Brazil's macroeconomic position that Moody's recently changed its outlook from neutral to negative, while Standard and Poor's downgraded Brazil's credit rating back in March.
Most pundits agree that Brazil really needs to enact deep structural reforms that would make its firms more competitive. Improving infrastructure, increasing transparency and cutting import tariffs would all help to reduce costs for businesses.
So far, Rousseff has proved unwilling to do that, but now it seems that Silva might.
Despite representing the Socialist party, Silva is actually standing on a pretty pro-business platform. She has promised to relax the regulated prices for key items such as fuel that are causing such massive distortions in the economy. She is also pushing for market-friendly measures, such as a new law to ensure the independence of the central bank.
Silva is also looking to cut state spending, which would improve Brazil's macroeconomic position. And, perhaps most importantly of all, she also wants to stop the currency interventions, which have kept the real strong and hammered Brazil's manufacturers.
A Silva win could be a big boost for our investments
It doesn't take a genius to see that a Silva presidency could be good for those investing in Brazil. Indeed, the local market, the Bovespa, has been buoyed by her climb through the polls.
But there is also potential for regional consequences.
Regular readers of The New World will know that I am a big fan of the Pacific Alliance a trade bloc made up of four of the region's most dynamic and open economies: Mexico, Chile, Colombia and Peru.
Brazil, however, is part of Mercosur, a more protectionist trade group which counts Argentina, Venezuela, Paraguay and Uruguay as its members.
Membership of this group has prevented Brazil from signing free-trade agreements with major markets such as the EU and the US. Yet, if elected, Marina Silva has promised to change tack and start making deals.
We could also see a deal with the Pacific Alliance, which would be good news for some of my long-standing tips.
What's happening in Brazil right now is indicative of what's going on across the region. Most parts of Latin America had a great start to the century as the commodity boom and a positive credit-cycle fuelled growth.
However, with commodity prices falling back now, these countries need to boost productivity if they want the good times to continue.
The Pacific Alliance countries have long been my favourites in the region, because it's clear that they are enacting these reforms. If Silva wins the election and is able to deliver some of her campaign promises, maybe we will be able to add Brazil to that list.
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James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.
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