As recently as three months ago, President Dilma Rousseff appeared to be in a strong position to win a second four-year term at an election scheduled for October 2014. She boasted a fairly high approval rating, her zero-tolerance approach to corruption in her administration had won her a reputation as a leader with integrity, and the main governing PT had made a respectable showing at local elections held in October 2012.

However, a wave of mass protests that gripped the country in June and July has left the president battered, and looking extremely vulnerable to a challenge from a political outsider, or possibly even from someone within her own party. The unrest has also dealt a blow to investor confidence, in the process reinforcing the negative economic trends that helped to fuel the protests.

A centerpiece of the five-point plan unveiled by Rousseff in a bid to appease the protesters is a proposal to hold a referendum on reform of the dysfunctional political system. However, the plan has run into a wall of opposition in the Congress that rules out any chance the referendum will be held prior to the 2014 elections.

Rousseff's iconic predecessor, Luiz Inacio “Lula” da Silva, might replace her at the top of the PT ticket in 2014.

Other measures approved by the Congress, including the classification of corruption as a serious crime and the dedication of income from oil royalties to the education budget, have helped to restore public order. Nevertheless, Rousseff’s popular support has plummeted, a development that has fueled speculation that her iconic predecessor, Luiz Inacio “Lula” da Silva, might replace her at the top of the PT ticket in 2014.

Some of Rousseff’s more optimistic supporters, whose numbers are shrinking, argue that the fall in the president’s popularity is a temporary phenomenon, and that the numbers will rebound now that the protests have subsided. However, her detractors, whose numbers are growing, will not give her the benefit of the doubt if her poll numbers do not show a substantial improvement in fairly short order, which is unlikely in the absence of a stream of positive economic news over the next few weeks.

Unfortunately for Rousseff, the winds are not blowing in her favor. Efforts to combat inflation have failed to stem the rise in prices of staple goods. And a combination of uncertainty surrounding U.S. monetary policy and fears that the government might seek to soothe social tensions with populist spending increases has triggered an inflationary depreciation of the local currency. With all signs pointing to further monetary tightening and the government under pressure to hit its fiscal target by any means necessary, Brazilians are facing a very real risk of a damaging bout of stagflation.

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The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




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