Concerns are mounting about political risk in Brazil amid doubts about the future policy directions of leading candidates in Octobers presidential elections.
Although the general consensus is that there will be continuity in economic policy whoever wins, the vagueness of leading candidates electoral platforms has alarmed observers. Nobody has a clue about the programmes of these candidates, said Marcelo Salomon, chief economist at Barclays Capital in São Paulo.
Dilma Rousseff, of the ruling workers party (PT) and Jose Serra, of the opposition social democratic party (PSDB) are most likely to face off in the polls.
But Paulo Bernardo Silva, Brazils budget and planning minister, said such fears are unfounded. President Lula has told his team to show that there is no political risk at all. There may be a few changes, but no radical shift that could mean there is a risk.
Silva added: We are not going to play with kind of argument. I think some analysts that make some noise in order to see if this creates a good impact for them in the [financial] markets.
Lulas former finance minister Antonio Palocci came to the IDB meeting in Cancun partly to address such concerns, emphasising that there will be no scare tactics during the electoral campaign. In 2002, a widespread panic engulfed the financial markets after Lula, a trade union leader who had never held an executive job before, took an unassailable lead in opinion polls.
Both Rousseff and Serra are so-called developmentalists who favour a greater role of the state in the economy. Nevertheless, there are differences between them. Dilma Rousseff prefers the state leading the development, while Serra is more sympathetic to private enterprise, said David Fleischer, a political scientist in Brasilia. But Serra does not share the same economic philosophy as the mainstream PSDB, and expressed differences with [the then ultra orthodox finance minister] Pedro Malan during the previous administration of Fernando Henrique Cardoso. Serra has also been a fierce critic of the central banks policy in recent years.
JP Morgan is among the institutions that have hinted that Serra would do a better job than her opponent. Even though he has not yet clarified his policy options, Serra is expected to adopt a tough fiscal stance in order to take some pressure off monetary policy.
The fate of Henrique Meirelles, Brazils central bank president, is a factor that may influence the markets. They have great faith in Meirelles. If he drops out of the central bank, this may be a risk factor, he added.
Meirelles is considering going back to politics and becoming a candidate in the elections in October, possibly as a senator or even as vice president, although a Rousseff-Meirelles is now considered unlikely.