Thu, 19/06/2014 - 14:54
Brazil's must-win World Cup opener against Croatia had important ramifications for the political future of President Dilma, says Maarten-Jan Bakkum, Emerging Market strategist from ING Investment Management…
Organising World Cup football in a country in the middle of a political, economic and social crisis is risky. This has been vastly underestimated in recent years, not only by FIFA, but certainly by the Brazilian authorities. Now that the competition has begun and strikes and riots are dominating the news, the tension is tangible. And clearly visible on the faces of both Sepp Blatter and Dilma Rousseff during the opening match between Brazil and Croatia.
But Brazil could not afford to lose this match. The risks for the competition, FIFA management and the political future of President Dilma were simply too great. It was highly unfortunate, though, that three dubious decisions by the referee were needed for the Brazilian win.
Now that early elimination for Brazil has probably been avoided, the football enthusiasm may well push the social dissatisfaction into the background somewhat. This is crucial for Dilma, who wants to be re-elected in the October elections. A chaotic competition without Brazilian success could deal the death blow to an already faltering Dilma campaign.
The president’s popularity has seriously diminished over the past few months. Despite the many subsidy schemes and tax breaks from which large parts of the Brazilian population have benefited. And despite the 33% rise in the minimum wage during Dilma’s term of office alone. The president has never been really popular, but now that economic growth is continuing to decline and, on balance, jobs are disappearing after years of strong employment growth, she is clearly losing ground to the opposition.
Dilma will never manage to turn the economic tide before October. The domestic investment climate is too poor and the demand for Brazilian goods abroad too weak. Her hopes of re-election are primarily based on the loyalty of people with the lowest incomes and on a dazzling World Cup.
In the meantime, investors are cautiously beginning to position themselves for a possible victory for the pro-reform opposition. The main opposition candidate, Aécio Neves, will implement an entirely different economic policy if he wins. He will reduce the government’s role in the economy and attempt to reduce the structurally high inflation and interest rates with fiscal reforms. A victory for Aécio would be good news for potential GDP growth and corporate profits. This presents opportunities for investors, especially if the World Cup fails to be the great success Dilma is so desperately hoping for.
If the Brazilian team wins, however, and the turbulence in the cities calms a little, then the Dilma campaign could get a boost. That increases the chance of a second term for Dilma. That would not be good for the Brazilian economy or market. The importance of the World Cup for Brazilian politics cannot be overestimated. The electorate’s perception of the competition could well be a deciding factor in the highly important October elections.
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