Samba beat threatens to slow, says Newton’s Whitbread

With the football World Cup just over a month away, the eyes of the world will soon be trained on Brazil. Newton Emerging Income Fund’s manager Sophia Whitebread discusses what could go wrong.

“All is not well within Brazil,” says Whitbread. “With an increasingly fragile economy, stubbornly high inflation and poor infrastructure resulting in a lack of competitiveness, President Dilma Rousseff faces a tough challenge to get re-elected.

Indeed, Dilma’s presidency has increasingly been characterised by protectionist policies – the tax on imported goods is a case in point – while government intervention has become the norm,” she adds.

“A 20% cut in electricity prices at the end of 2012 despite the very real threat of power shortages is one of many examples. Such action provides a significant disincentive to investors,” explains Whitbread.

Meanwhile, as far as infrastructure is concerned, according to The Economist Brazil invests just 2.2% of its GDP in infrastructure, well below the developing-world average of 5.1%.

Populist policies

“Dilma is in trouble in the polls – approval ratings for her government were 36% in March, down from 43% at the end of 20131 – and she has turned to more populist measures as a means of boosting support for her government,” says Whitbread.

Last week, the Brazilian government announced a 10% rise in payments under the Bolsa Família programme, a social welfare platform implemented by her predecessor, President Luiz Inácio Lula da Silva.

The programme provides financial aid to poor Brazilian families. This increase exceeds official inflation (currently running at around 6%) and should aid one-fifth of the population. “We don’t believe Brazil can continue to afford such generous hand-outs without causing bigger problems in the longer-term,” she says.

“Only a year ago, Dilma’s re-election was seen as a given, with little opposition of note. However, this has changed. Two opposition candidates – Marina Silva and Eduardo Campos – joined forces in October 2013 and they share many of the policies pursued by both Dilma and the former president, Lula.

More importantly, though, they have been placing emphasis on the importance of pre-Lula policy such as the maintenance of a proper primary surplus and greater fiscal discipline,” she adds. Meanwhile, support for Aécio Neves of the Party of Brazilian Social Democracy has also been growing in recent months.

For vast swathes of the population – the 80% not reliant upon Bolsa Família – the fight against inflation is an election deal-breaker. World Cup glory on home turf might subdue the unrest but away from the pitch Dilma faces a real battle to stay in government.

“Whether she is re-elected or not, one thing is for certain: change is needed. Quite simply, the current policy approach is unsustainable,” concludes Whitbread.

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