Down to the wire: the clock is ticking for Lula's team as elections near and growth sputters.

Author:Prada, Paulo
Position::Brazil Outlook
 
FREE EXCERPT

Markets have short memories. The electorate does not. Both are big worries for President Luiz Inacio Lula da Silva.

After taking office in January 2003, Lula was the toast of global investors. By putting fiscal responsibility above the ambitious social pledges of his campaign, the former union leader proved to markets his left-wing government was serious about getting the Brazilian economy on the right track.

Demand for Brazilian stocks and bonds, in turn, grew steadily during the first 15 months of his tenure.

But that was before U.S. interest rates started to rise, making emerging markets less attractive. Or oil prices began to soar, stirring fears of inflation. Or the Chinese government--itself wary of inflation--decided to lend less money to the country's ravenous consumers, slowing imports of steel, soybeans and other Brazilian commodities.

While beyond the control of the Brazilian government, such news this year put a drag on last year's optimism. Stocks and bonds have sagged since spring. The LATIN TRADE Consensus Forecat predicts Brazil will end 2004 at 3.8%, dropping to 3.5% in 2005.

And the foreign banks that once praised Brazil are now raising flags about the outlook for Latin Americas largest economy. As early as April, when the threat of higher U.S. interest rates first began to sour the appeal of Brazilian bond notes, J.P. Morgan--in a move soon mirrored by other major investment banks--began downgrading the country's debt ratings.

Then there are the concerns among Brazilians themselves. Business people see a lack of agility in the government's monetary policy. Inflation is under control, but the government has been loath to lower interest rates to spur consumer demand. The reluctance, critics say, is preventing the country's slowly-growing economy from really taking off.

What's more, the government's commitment to control spending is limiting its own ability to invest in the Brazilian economy. Nearly halfway into its four-year term, the government faces a dilemma that has come to define the Brazilian economy under Lula: Is it possible to foster growth while maintaining fiscal responsibility?

"The government now really has something to prove," says Maurice Costin, a director of the Sao Paulo Stare Federation of Industries, one of Brazil's most influential business organizations. "There was success in the fight against inflation and the fight to control government spending, but the real success will come by creating jobs and...

To continue reading

FREE SIGN UP