In many respects, Brazil has been on hold in the run-up to the presidential election in October. For some investors, particularly in the local stock market, betting on the election’s outcome, and the actions the winner might take, has been the preoccupation so far this year.

In the banking sector, privately-owned lenders have held back, and despite slowing loan growth at public-sector banks. Still, the public banks are increasing credit fastest. Private banks say they are being cautious in an uncertain economic and political environment.

The result of the election will no doubt be important, but whoever is picked in October will need to sharply adjust in economic policy if Brazil is to regain investors’ favor.

Budget figures are just one area where investors would like change: Brazil posted deficits in May and June, pushing the annualized figure to 3.6% of GDP at the end of the second half. It has an official target of a 1.9% surplus this year.

Raul Velloso, a Brasilia-based independent economist, says it seems like the government has given up on its surplus target for this year. Credibility on such matters must be reinforced after the election, and if the next administration starts to tighten fiscal policy, or remove price controls, the result will be a year or more of poor growth for the economy, and possibly recession.

Private-sector economists say that if the winner puts off a macroeconomic adjustment, however, low growth could persist — whereas an adjustment could pave the way for a rebound in economic activity in 2016 or 2017. Such uncertainty lies behind private banks’ reticence over stepping up lending this year.

However, the country’s reliance on public banks and other forms of state aid has stifled productivity, partly due to support for uncompetitive industries, private economists say. A rebound in the private banks’ market share might be precisely one of the things that are needed for growth and fiscal management to become more sustainable.

Yet an immediate turnaround in economic management is not inevitable, particularly if President Dilma Rousseff is re-elected.

Public sector officials tend to defend the existing approach of the government in Brazil. “We do not have any structural issues; we do not need any structural adjustment,” says João Carlos Ferraz, planning director at the National Development Bank (BNDES).

As Velloso points out, the country is likely to prove more resilient than in the past, due to its high level of international reserves. In the longer-term, though, an adjustment may be a question of when, not if. LF


Investors and analysts
are calling for deep reforms
after the October election

Lenders are becoming more
careful about expanding
their balance sheets