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Left-Wing Presidential Candidates Contribute to Economic Uncertainty in Brazil - 2002-08-27

In Brazil, public opinion polls show the presidential election in October is likely to be a contest between two left-wing candidates, who have called for changes in the current free-market economic model. Foreign investors, who have reacted with dismay at the prospect, are now trying to figure out which candidate would be the most palatable.

The two candidates are Luiz Inacio "Lula" da Silva, 57, of the leftist Workers Party, and former governor Ciro Gomes, 44, of a Workers Front coalition. Both are running strong in the polls, with Lula da Silva in first place with a substantial lead.

Behind in third place is Jose Serra, the candidate of the centrist government of President Fernando Henrique Cardoso. Mr. Serra is viewed as the candidate most likely to continue Mr. Cardoso's economic stabilization policies.

While some surveys show his support is growing, he still must overtake Mr. Gomes to have a chance at the presidency. To win, a candidate must receive an absolute majority in the October 6 election. If not, there is a run-off election between the two top vote-getters on October 27.

Mr. Serra's lackluster performance is one of the main factors that has created turmoil in financial markets in recent weeks. The turmoil stems from fears over what Mr. da Silva or Mr. Gomes might do to the economy, if elected president.

Lula da Silva grew up poor, went on to become a trade union leader, and then ran for president three times. Now in his fourth run, he has moderated much of his leftist rhetoric of the past, including threats to default on Brazil's debt. While promising to change the country's current economic model, Mr. da Silva also makes clear he does not intend to set up a socialist system in Brazil.

The "new" Lula has eased some, but not all the concerns of the markets. Daniel Tillotson, of Prudential Securities in New York, remains nervous.

"If the internal investors are not comfortable with these candidates, then how can we expect the external investors and the correspondent banks to feel comfortable," he said. "So it is this interaction between investors in Brazil's internal debt instruments, which is banks, mutual funds, and individuals and companies, the interaction of those investors with the political system, with the candidates, which is crucial here to solve the problem. And it's obvious that what Lula, for example, has said recently trying to moderate his tone, people just simply cannot forget the inclinations that he's had in the past."

Mr. Gomes, a former governor and finance minister, also promises a dramatic shift away from current economic policies. In a presidential debate this week, he spoke of the need for change.

There is no solution for Brazil until it completely abandons the neo-liberal economic model, in which the market is solely responsible for productivity," he said. Instead, Mr. Gomes called for a partnership between the public and private sectors to create new tools to solve Brazil's problems.

Political analyst David Fleischer says Mr. Gomes is less radical than he seems. Mr. Fleischer, who teaches politics at the University of Brasilia, also believes Mr. Gomes will turn out to be more moderate because he has made a political alliance with top members of a right-wing party, the PFL.

"My reading on him is that he's a sheep in wolf's clothing, that he's masquerading as a wolf but he's really a sheep because he's an anti-elite within the same of system," he said. "He's been part of this system ever since the late 70s when he began in politics in the state of Ceara. But his position and his campaign rhetoric is very, very critical and quite severe of Fernando Henrique's government and the economic model, and in some points even more severe than Lula's criticism. But his government would be dominated by the PFL if he was elected, and I'm sure the PFL would not allow him to do anything radical."

But investors like Daniel Tillotson remain concerned, especially over how a new president will deal with Brazil's debt of $250 billion. Mr. Tillotson said he is not encouraged by what he has heard from Mr. Gomes regarding the debt.

"He has said enough about restructuring of internal debt in the past that people have to take it seriously because, given what's already happening it's obvious that, regardless of who is the next president, at some point in time the markets are going to probably put him under pressure, and what really matters then is how the future president reacts at such time," said Mr. Tillotson. "If you already have an inclination towards debt restructuring, then obviously you will revert to that inclination."

Recent comments by Mr. Gomes, in which he dismissed market concerns, also are likely to weigh heavily among investors.

But in the end it is not investors who will choose the next president, but Brazilian voters, and what the opinion polls indicate so far is that they want a change from the policies of the current government.