Political uncertainty unsettles Brazil

Market watchers blame the uncertainty surrounding the outcome of Brazil’s presidential elections for the poor performance of the Brazilian stockmarket over the last six weeks. While as of October 16th the MSCI World index had regained its September losses to close at more than 5% up the MSCI Brazil had lost 0.4%.

Fernando Luque 21.10.2002
Lula da Silva, the candidate of Brazil’s workers party, won the first round of elections with 47% of the votes. He also looks well placed to win the final round on October 27th. Even if there are few doubts about the outcome of the election uncertainty remains as to how Lula, if elected, will solve the country’s debt problem.

Since the beginning of September the Brazilian real has lost more than 22% of its value against the dollar. The Brazilian central bank raised its interest rates to 21% to defend the currency.

Prospects

The prospects for the region are not very encouraging. Both the International Monetary Fund and the United Nations expect a decline in GNP this year, of 0.5% and 1% respectively.

According to George Soros, the well-known financier, Brazil’s problem is not who will rule the country but how to solve its enormous debt problem. In his opinion the country will be forced to renegotiate its debt no matter who wins the election. In fact there are a growing number of analysts who think that the region is heading towards a repetition of the 1980s debt crisis.

European fund managers expect Latin America to be the worst performing region over the next year according to the latest Morningstar survey. This outlook is likely to continue while the uncertainties remain.

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Fernando Luque

Fernando Luque  es el Senior Financial Editor de www.morningstar.es