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Lula
clear favourite in first round but not sufficiently to avert run-off
The presidential election will go into a second round voting on 27
October. According to the Superior Electoral Tribunal, left-wing Worker’s
Party (PT, Partido dos Trabalhadores) presidential candidate, Luis Inácio
da Silva (‘Lula’) did not garner sufficient votes needed for a first round
victory, obtaining 46.4% of the vote. José Serra, the market favourite and
member of incumbent president Cardoso's Brazilian Social Democratic Party
(PSDB, Partido da Social Democracia Brasileiro), came in second behind
Lula with 23.2%. Anthony Garotinho, governor of Rio de Janeiro and
representative of the left-wing Brazilian Socialist Party (PSB, Partido
Socialista Brasileiro), came in third with 17.8% and Ciro Gomes, the
ex-finance minister, former governor of the north-eastern state of Ceara
and candidate for the Popular Socialist Party (PPS, Partido Popular
Socialista ex-PCB, Partido Comunista Brasileiro) garnered 11.9% of the
vote.
Given the strong showing in the first round and a high likelihood that the
left-leaning candidates Garotinho and Gomes will throw their support
behind Lula, the PT candidate stands good chances to win the stand-off
election against Serra. Unlike Lula, the incumbent party’s candidate faces
an uphill battle. Recent opinion polls have consistently confirmed that
Lula will win the second round. The most recent CNI/Sensus poll conducted
on 27-29 September has Lula winning a run-off election with 53.4% to
Serra’s 35.2% with balance being the null vote.
Nevertheless, the Serra camp may still strengthen its vote and is likely
to reinforce its emphasis Lula’s weaknesses on the issues and rebuilding
alliances with traditional allies. Serra is expected to focus on
discrediting Lula via his inexperience on the national political stage and
trying to fuel voters concerns about the leading candidate’s policy
priorities. The PSDB’s candidate is likely to strive to rebuild the
broad-based alliances that endorsed Cardoso in his bid for the presidency.
In particular, Serra will try to use outgoing President Cardoso to regain
the support of the leaders of one of the country’s largest parties, the
conservative Liberal Front Party (PFL, Partido da Frente Liberal), which
supported Gomes in the first round but is unlikely from an ideological
standpoint to tend toward the Lula. Finally, the PSDB strategy will be to
leverage the support of the party’s governors in the larger states who had
previously been focused on their own campaigns.
PT
makes gains in both houses but governing alliance still provides strong
counterbalance
According to preliminary results, left-leaning parties, which currently
form the opposition, gained eight seats in the Senate, raising its share
of total seats to 33.3% from 23.4%, and in the lower house estimates give
the opposition a gain of 11 seats (from 172 to 183), which means that the
opposition’s percentage total of 513 seats in lower house rose from 33.5%
to 35.7%. Therefore, assuming that Lula wins in the second round, he will
face a strong opposition in the legislature and effective governance will
rely on his ability to negotiate alliances. Furthermore, the new
composition of the legislature could provide a key counterbalance to any
populist reform agenda that seeks to reverse market-based economic reforms
implemented in recent years.
Markets
tank and foreshadow continued volatility
The markets reacted negatively to the fact that political uncertainty will
persist and that Lula stands a very good chance of winning the run-off
election. The daily rate of depreciation of the real reached a two week
high of up to 3.5% during the day but managed to recover ground as the
Central Bank raised minimum capital requirements, which enabled the
currency to close just 1.0% weaker than on the prior trading day.
Similarly, equity markets dropped off significantly. The BOVESPA index
declined 4.3%, practically erasing strong gains made in the prior week.
Finally, the benchmark JP Morgan EMBI+ Brazilian sovereign bond spread to
comparable US Treasury bonds deteriorated 76 basis points compared to the
prior day, ending at 2,048 basis points to the US Treasury.
Political jitters prompt further exchange rate deterioration
Following the brief respite in August, the real resumed its political
uncertainty-induced weakening trend observed throughout most of this year.
In September, the currency experienced its largest depreciation, weakening
22.4% to the US$ to reach 3.89 reais to the US$. At the September level
the real had depreciated a staggering 40.4% relative to the US$. The
currency stabilised somewhat in the week leading up to the nationwide
elections, as concerns eased that a victory by opposition presidential
candidate Luiz Inacio ‘Lula’ da Silva could prompt a default.
To stem an even more pronounced deterioration in the real, the Central
Bank has been forced to intervene in the foreign exchange markets by
selling international reserves. As a result, international reserve levels
have continued to decline. The first drawdown of US$ 2.9 billion from the
International Monetary Fund (IMF) under the terms of the US$ 30.4 Billion
stand-by loan approved on 6 September buffered international reserves
temporarily. However, the rate of daily declines in international reserve
levels accelerated in September to US$ 96 million from US$ 73 million in
August. Participants anticipate reserves to decline further from their
current levels to US$ 35.6 billion by the end of the year. Nevertheless,
panellists believe that the exchange rate will experience a rebound by the
end of the year. Exchange rate weakening is anticipated to ease
significantly next year. In fact, the Consensus sees the currency
virtually unchanged from the 2002 year-end level.
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