Aecio Neves, from the centre-right PSDB party, did far better than expected and will now face President Dilma Rousseff in a run-off for the job of president on 26 October. Neves polled 33.8% versus Dilma’s 41.4%.
Marina Silva faded to 21.3% - the same she polled in the previous election. The focus will now be on who Marina supports or does not support in the run-off. Neves polled significantly better than predicted in the polls, suggesting that he now has strong momentum.
He also has funds to finance a strong campaign. The market is likely to be warmly disposed toward Neves, who has already appointed Armenio Fraga, a credible former head of the central bank, as its future finance minister.
Brazil faces three major challenges: a credible economic team, the need for fiscal adjustment and reform to reduce the bloated state sector, especially in credit. Compared to Dilma, Aecio would deliver the first two but it is unlikely, in our view, that he would have the votes to significantly change Brazil’s current status as ‘the France of South America’.
Meanwhile, economic weakness continues in Brazil. The August primary balance was the lowest since 1997 as weak economic growth and ineffective subsidies continue to take their toll on the public finances. A primary surplus of less than 1% of GDP now seems likely this year, down from 3.4% of GDP in 2008. Industrial production rose 0.7% month on month in August, which was much better than 0.1% expected.
Aside from the usual cyclical ups and downs, a sustained recovery in Brazil is unlikely until after the election and only if the government changes its economic team and begins to address the economy’s cyclical and structural problems.
