If Elected Brazilian President Rousseff Might Raise Taxes on Foreign Capital

Dilma RousseffWith Brazilian public opinion polls confirming the growing commanding gap between Brazil’s ruling coalition presidential candidate Dilma Rousseff and her main contender José Serra, analysts have begun to ponder on her policies.

According to a Nomura Securities International Inc. report, Ms Rousseff may take “bold and unexpected policy actions,” including budget cuts to allow for lower interest rates, if she holds onto a “commanding” lead and is elected Brazil’s president.

Rousseff, the chosen successor of president Luiz Inácio Lula da Silva, could be considering additional taxes on capital inflows to stem gains in the real, said Tony Volpon, head of emerging-market research for the Americas at Nomura in New York.

“The policy mix of tighter fiscal and looser monetary policy would go a long way in alleviating part of the upward pressures” on the Real, Volpon wrote in the report, entitled “Dilma’s First 100 Days.”

Brazil’s Real, whose 33% gain against the U.S. dollar last year was the best performance among 25 emerging market currencies tracked by Bloomberg, has fallen 1.4% this year.

A smaller fiscal deficit will allow the central bank to cut its benchmark interest rate to 10% in 2011, from 10.75% today, Volpon said. Brazil’s fiscal deficit widened to 3.4% percent of GDP in the 12 months through June, up from 3.3% in May and 2.3% two years ago.

Volpon believes there is “a good prospect” of the measures being implemented early in a Rousseff administration, when her political capital is high.

Rousseff’s economic team may also be considering a rule to limit the growth of public spending to below the growth of GDP, as well as reforms to the tax code, Volpon said.

The measures would help Rousseff politically by distinguishing her from Lula. Lacking her mentor’s charisma, Rousseff could struggle to hold the ruling coalition together unless it succeeds in setting the policy agenda, Volpon said.

“If Dilma cannot come out from Lula’s shadow early in her administration, the chances that her presidency will end in failure will be quite high, especially if Brazil confronts any kind of serious economic setbacks, something that did not happen during Lula’s eight year reign,” Volpon said.

The latest opinion polls released this week show Ms Rousseff could defeat the former governor of São Paulo José Serra in the first round of voting October 3. According to the Sensus poll released Wednesday Ms Rousseff has a support of 46% while Serra had 28.1% and Green Party candidate Marina Silva 8.1%.

The poll was taken August 20-22. A candidate must poll 50% plus one of valid votes, or more than her competitors combined, to avoid a runoff at the end of October.

Mercopress

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