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Rousseff's Popularity Drops as Brazil's Economy Overheats
Aug. 17, 2011

Published by Minyanville

It has been a difficult few weeks for Brazilian President Dilma Rousseff, whose popularity has dropped 6% since March, after a spate of resignations in the upper echelons of her government and a much-criticized economy.

Earlier this month, Nelson Jobim, the civilian head of the military, quit after saying that he was surrounded by “idiots.” He was the third cabinet member to resign in as many months. Last week federal police arrested 33 officials from the tourism ministry and associated businessmen for alleged embezzlement in preparation for the World Cup in 2014 and Olympics two years later.

Rousseff came into power as a competent leader eight months ago but is now beginning to be seen as a political novice, especially as she governs in the wake of popular former Brazilian president Luiz Inácio Lula da Silva. With presidential elections due in 2014, thoughts are turning to whether Rousseff should stand for a second term or allow Lula da Silva back at the helm.

Communications Minister Paulo Bernardo has said that Rousseff is likely to run, “if she has the desire.” Lula da Silva remains popular, however the assumption in government is that Rousseff will stand. “I don't see that question being resolved without a conversation between the two of them. It's very early still,” said Bernardo.

Lula da Silva has repeatedly said that Rousseff will stand, however, the rumors and speculation will only fuel a growing discontent with the incumbent president.

It is Brazil’s economy that is one of Rousseff’s biggest woes. Last week, she told rebellious congressional allies not to spend too readily as tight budget control was the only way to ensure that Brazil’s economy was sheltered from the global crisis.

The recent downgrade in growth expectations for both the United States and China is expected to bring growth in Brazil down 0.20% in 2011 and 0.15% in 2012, according to Tony Volpon, an analyst at Nomura in New York. While the impact on Brazil will be limited, demand for its key exports is likely to fall. “Brazil, as a low savings/high consumption economy, needs a steady inflow of foreign capital to maintain investment which facilitates a higher level of growth,” says Volpon.

The South American giant is thought to be overheating, following rapid growth of 7.5% in 2010 and soaring inflation that struggles to be curbed by numerous interest rate rises. However, in an op-ed piece in Brazilian newspaper Valor Economico, Volpon argues that the growth cycle may be over, though no thanks to government policy. “The current model, based on the high commodity prices, expansion of credit and expansion of the labor market is already showing signs of exhaustion,” he writes.

Oil
Rousseff will be pleased that high world oil prices have pushed Petrobras’ second-quarter profits up 32% to $6.89 billion, as the state-controlled oil firm invests around $225 billion over the next five years into new offshore discoveries. “Petrobras’ story is one of regaining investor confidence,” said Gustavo Gattass, an analyst at Banco BTG Pactual. “Petrobras stands out in our view for its long-term growth potential, its leverage to oil prices.”

The company is likely to issues more bonds this year as it seeks funds for the investment. “We don’t need to raise debt, but if the money is available and cheap, we will,” said Chief Executive Officer Jose Sergio Gabrielli. The company raised nearly $14 billion in the first half of 2011 and its “finance department is not going to take a holiday,” according to Chief Financial Officer Almir Barbassa.

Brazil’s strengthening -- and arguably inflated -- real, helped reduce the oil firm’s payments on dollar-denominated debt, according to Barbassa.

However, all is not well for the firm as Gabrielli admitted last week that Petrobras is likely to be fined by the government as it is unable to prove that it used locally produced equipment in some of its exploration. The government requires that between 55% and 65% of equipment used in deep-water exploration must be provided by Brazilian companies.




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© Girish Gupta