Brazil’s unfinished business - A view on the presidential elections

Brazil’s unfinished businessA view on the presidential elections

By Thomas Kamm, Partner, Sao Paulo

September, 2014

2 | 2014 | BRUNSWICK ©

Brazil’s unfinished business By Thomas Kamm, Partner, Sao Paulo

No sooner has hosting the World Cup ended than Brazil is in the throes of a new competition: a presidential election. And it’s proving to be as full as surprises – and as unpredictable - as the tourney that saw the home favorite routed in an unprecedented 7 to 1 defeat in the semi-finals to eventual winner Germany.The tragic death of candidate Eduardo Campos in August has proven to be an electoral game-changer. In the space of a few weeks, Marina Silva has gone from Mr. Campos’s running-mate (and something of an also-ran, as Mr. Campos was in third place in opinion polls at the time of his fatal plane crash) to front-runner, and incumbent president Dilma Rousseff’s status has changed from favorite to challenger. The latest polls show Ms. Rousseff running ahead of Ms. Silva in round one on October and Ms. Rousseff now slightly ahead of Ms. Silva in the October 26 runoff, but within the margin of error. Third-place contender Aécio Neves is gaining strength, but will likely not make the runoff.Whatever the final outcome, Ms. Silva’s astonishing rise speaks volumes about Brazil’s state of mind today and the challenges that await the next government. While she is not a newcomer on the Brazilian political scene – she

was Environment Minister in Luis Inacio Lula da Silva’s government and ran a strong third in the 2010 presidential elections on an environmentalist platform – Ms. Silva’s Lula-like rise from poverty (see separate profile) makes her appear like an anti-system candidate who embodies change. In many respects, her appeal is an extension of the wave of protests that swept the country last year in support of improved public services and an end to waste and corruption, and her election would signal a further clamor from Brazilian society for a new economic and social compact to consolidate the country’s emergence on the global scene.

A different Brazil narrative

Indeed, the Brazil narrative today is very different from the prevailing story-line when the country last went to the polls in 2010. At that time, Brazil was in the midst of a commodity-driven economic boom, with growth running at a China-like 7.5%. Building on the economic stability that was the hallmark of his predecessor, Fernando Henrique Cardoso, President Lula introduced his signature Bolsa Familia plan and other redistributive policies that lifted 40 million people out of poverty and into the consuming classes. The country was on a roll, having won the right to host back-to-back the football World Cup in 2014 and the Olympic Games in 2016, which were largely viewed as

Brazil’s elections – A primer

■ Brazil’s presidential elections are in two rounds: the first is on October 5; if no candidate wins 50%+ of the vote, a runoff between the two-best placed candidates takes place on October 26

■ The presidential term is four years. Presidents are limited to two consecutive terms, but can seek re-election after a four-year hiatus.

■ Voting is compulsory in Brazil for those aged between 18 and 70. This results in turnout rates exceeding 85%.

■ There are 142.8 million eligible voters

■ There are 11 candidates in the presidential election, but only three stand a serious chance: Dilma Rousseff, Marina Silva and Aécio Neves

■ All candidates have free air time on prime-time television. Air time is allotted according to the party’s support base in the lower house of Congress; the bigger the coalition, the more air time. As a result, Dilma Rousseff, whose coalition spans 9 parties, has considerably more air time than other candidates: 11.5 minutes out of 25 minutes.

■ At the same time as they elect their President, voters will also be voting for 513 Federal representatives, one-third of the Senate, state governors and state representatives.

■ The elected President will take office on January 1, 2015

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coming-of-age events for a country that was long dismissed as the perennial “land of the future.” It seemed like the B of BRICS’ time had come, and it would only be a matter of years before Brazil would become the world’s fifth-largest economy.But fast-forward four years and the Carnival atmosphere has dissipated, as have the hyperbole and hubris. The country is in a technical recession, with GDP falling two successive quarters, and even if it picks up in the third quarter, as the government is predicting, private forecasts say GDP growth will be around 0.3% this year. Inflation, while tame compared to the devastating hyperinflation of the early 1990s, is running at an annualized rate of 6.5%, leading the Central Bank to wage a restrictive monetary policy, with interest rates of 11% a year. Consumption, the engine of Brazil’s rise, has slowed, investment is down and industrial production is falling. Even with unemployment at record low levels, a recent study by Washington, D.C.-based Pew Research Center showed that among the 44 countries surveyed, Brazil was the country with the biggest year-on-year drop in economic confidence. The B of BRICS seems S for stalled, economists cite it among the “fragile five” economies that are particularly vulnerable to interest rate hikes by the US Federal Reserve, and Mexico, with its reform-minded President, has supplanted Brazil as the markets’ Latin darling.To be sure, Brazil still has a

lot going for it. It remains a vast consumer market that continues to attract large inflows of foreign investment, as companies continue to see untapped potential and favourable demographic trends. The country has a dynamic private sector with a strong entrepreneurial streak and pockets of excellence in industries including oil & gas and aerospace. Brazil boasts an abundance of strategic natural resources and is a global commodities power. Millions of new consumers have been integrated into the economy, inequalities have declined, and the United Nations’ Food and Agriculture Organization has just officially removed Brazil from the World Hunger Map. As the current electoral fight shows, it is a strong and vibrant democracy. Brazil is an avid digital nation. Few countries have changed so dramatically in the space of 20 years, and transformations are always a bumpy road.

A missed opportunity?But if the 1980s were known in Latin America as the “lost decade,”

Brazil’s past few years appear to many not just as lost momentum, but a lost opportunity. After the 1994 Real plan strangled hyperinflation, laying the foundations for economic growth, and President Lula’s social reforms, many were expecting the World Cup and Olympics to provide the trigger for a new forward stride, including structural reforms that address issues holding back Brazil’s growth. But like the Brazilian team did on the field, Brazil dropped the ball: Many of the planned infrastructure projects have remained on the drawing boards or remain incomplete, and Brazil today still has unfinished business ahead if it is to live up to its promise. “When people will assess President Dilma’s mandate in the future, they will probably not condemn it for having produced low growth, but for having squandered opportunities that are not likely to be repeated,” wrote Antonio Marcio Buanain, professor of economics at Unicamp University (whose faculty is broadly supportive

Growth is slowing... ...and inflation remains persistently high

7,5%

2010 2011 2012 2013 2014e 2010 2011 2012 2013 2014e

Source: IBGE and the Focus Report (Brazilian Central Bank)

5,91%

6,50%

5,84%5,91%

6,40%

2,7%

0,9%

2,3%

0,33%


of Ms. Rousseff’s state-led development policies), in a commentary in Estado de Sao Paulo.The government blames the international environment for the slowdown, and certainly the end of the commodities boom, slowing Chinese demand for raw materials and a challenging global economy have not helped. But there is a widespread consensus among the business community, economists and political analysts that Brazil’s growing pains also have home-grown roots, and that the government has been somewhat lax on spending, intervened excessively in business and sought quick fixes to stimulate consumption rather than push for deeper structural reforms.

Tough choices aheadThis means that whoever wins, the next President will have her work cut out for her. While their economic programs are short on detail, the main differences between candidates center on how fast they will make a necessary fiscal adjustment, how they will balance much-needed spending on education –which many say is Brazil’s number one priority - health, transport, infrastructure and welfare programs with the need for fiscal rectitude, and how harshly they will attack inflation (which will likely rise before it falls as

the government has controlled energy and other prices). Some, such as Aecio Neves’s likely finance minister, former Central Bank governor Arminio Fraga, say mild shock therapy would boost confidence and investment; others are warning this might

lead to a recession. But beyond the immediate issues, there is a widely-held belief that Brazil’s consumption-fueled growth model appears to have run its course, and the country needs a new growth agenda to consolidate its transformation, focused more

on investments and improving the competitiveness of the Brazilian economy. A victory by Ms. Silva would propel Brazil into uncharted waters. Having run in 2010 under an environmentalist mantle, she forged an alliance

with Mr. Campos’s center-left party when she failed to obtain the necessary support to register her party. Combining an orthodox position on economic policy, a conservative stance on societal issues consistent with her evangelical beliefs, all the

Social indicators are improvingInternet users (million) Higher education

(million students)

Child mortality(death per 100 births)

Mobile phone users (% of population over 10 years old)

2009 2013 2008 2013Source: Ibope - Nielsen Source: Inep

Source: IBGE Source: Pnad

64.8 5.87.31

102.3

2010 2014 2009 2013

17.2257.6%

75.5%

14.4


while vowing to continue – and even expand – the social policies that were the hallmark of the 12-year rule of Presidents Lula and Rousseff’s Workers’ Party, Ms. Silva’s platform is a delicate balancing act to maintain her strong popular appeal while extending her support to the business community, with some senior figures coming out in public in her favor. Moreover, bereft of a strong party and majority to support her, she will be at the mercy of Congressional alliances that are notoriously fickle in Brazil, and also notoriously dependent on pork-barrel politics.But Ms. Rousseff remains popular among beneficiaries of welfare programs, notably in the Northeast, and could still pull through in the final stretch. If reelected, Brazil will likely see a policy inflection – which Ms. Rousseff has signalled herself, saying that Finance Minister Guido Mantega, who has held the position for the past eight years, would be replaced. Investors are looking for signs of more orthodox economic policy, less government intervention in business and measures to foster investment and competitiveness.

Policy conundrumsNothing better encapsulates both Brazil’s potential and its difficulties – and the policy conundrums, issues

and challenges faced by the government, both outgoing and incoming – than oil giant Petrobras and the country’s energy sector.Under President Lula, Petrobras was something of a proxy for Brazil’s new ambitions. After the discovery in 2006 of offshore oil reserves as big as those in the North Sea deep underwater beneath a thick bed of salt, President Lula proclaimed that Brazil had bought “a winning lottery ticket” and was on its way to becoming “the greatest energy power on the planet.” It was a time for superlatives: in 2010, state-controlled Petrobras launched what was at the time the biggest capital increase ever, a $70 billion issue that was partly subscribed by the government. The company also launched the world’s largest capital expenditure program, valued at

$224 billion over five years. But today, Petrobras has become something of a political football in the presidential campaign, a symbol of the government’s contradictory priorities and the fulcrum of several unfolding corruption investigations involving hugely overpriced oil refineries and kickback schemes allegedly favouring government allies. While Petrobras’s technical prowess makes it an industry leader, a combination of conflicting policy goals, legal and regulatory delays and burdensome local-content requirements are weighing on Petrobras’s finances and taking some of the shine off Brazil’s tantalizing oil prospects. When the government, after years of delays, finally auctioned the pre-salt Libra field last October, only one consortium showed up. Indeed, in order to keep inflation


under control, the government is preventing Petrobras from raising fuel prices at the pump – in effect, indirectly subsidizing consumption. At the same time, in order to stimulate the auto industry and protect jobs, the government is providing tax incentives that have led to a huge increase in the local car fleet (although production in the first half of this year has dropped). The upshot: unable to meet local demand, Petrobras is forced to import gasoline and diesel at market prices, and then sell them domestically at below-market prices. And there’s more: because the gas price is kept artificially low, the alternative of sugarcane-based ethanol has lost attractiveness, throwing the “green fuel” industry that is one of Brazil’s great success stories into crisis and adding to the disarray in the energy sector.

The predictable result of this apparent schizophrenia is that Petrobras is deprived of much needed cash even as it faces huge capital spending demands. While Petrobras is extracting 500,000 barrels of oil a day from its pre-salt fields, it has become the most-indebted and least-profitable of the world’s 15 largest oil companies by market value, according to Thomson Reuters data. Among the top five market capitalizations in the world at its peak, Petrobras’s stock price has plunged in the past year – though it is now recovering, fuelled in part by speculation that the elections could result in a government and policy change.

A new growth agendaThe Petrobras story is emblematic not just because of its huge importance for Brazil, but because it contains many of the ingredients that the next Brazilian administration –whoever the winner – will need to address. The business community is pushing for deep structural reforms, but the broader public is more focused on issues closer to daily life, so the government will have to contend with conflicting priorities. Businessmen say unlocking Brazil’s full potential will require a new growth agenda that should focus on a number of interlocking issues and barriers to growth including:

More big picture, less micro-management: As evidenced by the Petrobras example, Brazil’s government is actively pursuing a number of conflicting policy objectives, and uses a variety of tools, such as subsidies, import tariffs, tax breaks, or local-content requirements to achieve them. While they may make sense individually, they result in a crazy-quilt of seemingly inconsistent measures that boost some sectors – but at the expense of others. The electricity sector is a case in point: To drive down Brazil’s high energy costs, the government in 2012 offered electricity companies a choice of automatic early renewal of their concessions, but at lower rates, or continuing to charge the prevailing rates, but risk losing their concessions when

The country's competitiveness is falling...

...but Foreign Direct Investment remains strong (billion/USD)

Source: WEF – The Global Competitiveness Report

Source: UNCTAD and Deloitte

2012 2013 2014

48th

56th 57th

2010 2011 2012 2013 2014

48,5

66,6 65,3 64 60


they expired in 2017. While beneficial in terms of inflation, the lower tariffs led to a surge of demand, just as a drought emptied vital water reserves, as Brazil draws nearly 80% of its electricity from hydropower. The upshot: distributors were forced to buy the shortfall on the spot market at record-high prices, causing a financial crisis in the sector that forced the government to arrange a bail-out whose cost will end up being borne both by the Treasury and consumers. Many businessmen and analysts say such power plays and targeted incentives –which often become entrenched regardless of their efficiency - have hit business confidence and deterred investment. Instead of micro-managing and adopting piecemeal stopgaps, Brazil would gain from strategically focusing its efforts on sectors where the country has a clear competitive advantage, developing consistency and transparency and building the regulatory, legal and business environment that would favor long-term investment. “We need a national agenda for the next 20 or 30 years,” Cledorvino Belini, CEO of Fiat Latin America, said in an interview with Folha de Sao Paulo.

Integrating into the global economy:Brazil offer a stunning paradox: it is the world’s fifth-largest recipient of foreign direct investment, according to the United Nations Conference on Trade and Development, and yet economist Edmar Bacha, one of the authors of Brazil’s

1994 Real stabilization plan, affirms that “Brazil is an isolated country.” Indeed, despite a strong and diversified industrial base, and despite strong export growth in recent years, notably of commodities, Brazil’s share of global trade in goods and services is only 1%. Investors pile into Brazil because of the size of its domestic market, not for its openness to capital flows. Protected by high import barriers – an average of 22.1% vs. a global average of 14.1%, according to The Boston Consulting Group – local industries have little incentive to produce goods for export. A Toyota Corolla produced in Brazil costs more than twice what it costs in the US. Take Brazil’s auto industry: while Brazil is the world’s eighth-largest auto producer (it was recently overtaken by Mexico), it ranks 21st in auto exports. Mexico exports more than 80% of its production, Brazil exports only about 11%, mostly to Argentina, with whom it has a free-trade agreement. “Brazil is among the countries that have least exploited the potential of international trade,” wrote the World Bank in 2013 in a working paper on Brazilian exports. In a recent report on “Connecting Brazil to the world,” the McKinsey Global Institute estimates that Brazil could add up to 1.25 percentage points to its average annual GDP growth in the years ahead through deeper integration into the global markets and networks, which “could provide competitive pressures that spur Brazilian companies to innovate, invest and modernize.”

Reducing the “Brazil cost”: A Brazilian tax lawyer, Vinicios Leoncio, recently put together a volume compiling all Brazil’s tax rules. It doesn’t make for light reading: it weighs 7.5 tons and runs at 41,266 pages. Such is the maze of regulations concerning taxes, labor laws, and various licenses that Brazil has coined the term “custo Brasil,” or Brazil cost, to describe this environment. In the latest edition of the World Economic Forum’s Global Competitiveness Report, Brazil came out next-to-last among 144 countries in the “Burden of government regulation” category, topped only by Venezuela. “Doing business in Brazil is excessively costly and complex,” wrote The Boston Consulting Group in a recent report. According to the World Bank’s annual “Doing business” report, Brazil ranked 116th out of 189 countries in terms of business environment, and ranks in the bottom third in a number of categories, with a special mention for taxes: according to a World Bank and PwC study, it takes the average company 2,600 hours a year to comply with all Brazilian tax rules, more than any other country in the world. As a result, many businessmen cite tax reform as an urgent priority – and when they say that, they are not only calling for lower rates, (Brazil’s overall tax burden is 36% and has been rising steadily) but a simplification of the system. Indeed, the consequence of all this red tape and paper work is a huge burden on Brazil’s productivity and competitiveness.


Investing in infrastructure:After nearly a decade on the drawing boards, the city of Goiania recently completed a gleaming new airport terminal. But there’s a hitch: the access to the terminal as well as taxiing and parking facilities for aircraft are not ready. “In other words,” wrote the Estado de Sao Paulo newspaper, “it’s a terminal that can receive passengers, but where planes can’t arrive.” Examples abound of delayed or unrealized infrastructure projects, such as a high-speed train between Sao Paulo and Rio de Janeiro, and this is a major impediment to the country’s growth. “The Brazilian infrastructure gap plays a big role in slowing growth that would be much greater, given Brazil’s resources, but for shortfalls, especially in transportation infrastructure and logistics,” wrote PwC in a recent report. In the 1970s, Brazil invested 5.4% of its GDP in infrastructure, according to Moody’s. Today, that rate has slowed to 2.3%, well below the world average of 3.8%. This has resulted in huge bottlenecks and competitiveness shortfalls. A few examples: 58% of Brazil’s transport is through roads – more than any other continental country; but less than 15% of Brazil’s roads are asphalted. This means the cost of moving soybeans from farm to port costs $145 per ton, six times the cost for a US producer. Once in the clogged port, the cargo will take an average of 5.5 days to be cleared by inspection, compared to 2.2 days in the US. According to the World Bank, the cost of exporting a container

from Brazil is almost four times that of China. Overcoming an earlier reluctance to involve the private sector, Ms. Rousseff’s government in the last two years has opened up bids for port, road and airport concessions, but many projects have been delayed by regulatory hurdles and insufficient profitability levels. As a result, many businessmen are calling for more flexible rules, and Paulo Resende, the head of the Center for Infrastructure and Logistics at Fundaçao Dom Cabral, suggests that Brazil create a Strategic Infrastructure Board that would insulate long-term projects from political interference to speed up much-needed investments. Stimulating productivity and competitiveness: To many businessmen, productivity is the key challenge facing Brazilian companies. According to a recent BCG study, 74% of Brazil’s growth over

the past decade was due to an increase in the number of people entering the workforce, while only 26% was attributable to productivity gains. This compares with 90% productivity gains for China or 70% for South Korea. As a result, Brazil is losing ground in terms of global competitiveness. Over the past three years, Brazil has slipped from 48th to 57th in the World Economic Forum’s annual Global Competitiveness Report. Among the BRICS, only India is behind Brazil. In a recent report on “The shifting economics of global manufacturing,” BCG wrote that Brazil is now “one of the highest-cost countries for manufacturing.” Through a combination of wages rising above inflation, unfavourable exchange rates, high energy costs and low labor productivity, wrote BCG , Brazil experienced ‘the most dramatic swing” in terms of competitive edge of


the 25 economies it surveyed: its average costs were 3% lower than in the US in 2004 and are estimated to be 23% higher in 2014. This makes attacking the issue a major priority for the incoming administration, which would also require further investment in education to build human capital. “In the next government, productivity should be placed on the same pedestal as were monetary stability under the Fernando Henrique Cardoso

government and social inclusion under the Lula government,” says economist Fabio Giambagi, the co-author of a recent book called “Complacency – Why Brazil grows less than it could.”The above agenda is ambitious, but Brazil has demonstrated in the past its ability to radically transform itself. Today, its transformation is incomplete and it cannot count on high commodity prices or continued credit-driven consumption

to stimulate growth. The country is at a turning point, and while change is likely to be gradual, owing to the country’s complexities, the next government will have the task of reinventing Brazil’s growth model to consolidate the country’s spectacular advances of the past two decades. Brazil may not have won the World Cup, but it has many assets on its side to be a winner in the global economy.

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The three main contenders

Dilma Rousseff, Workers’ Party (PT)

Dilma Rousseff, 66, is Brazil’s incumbent President. The hand-picked successor of the phenomenally popular outgoing President Luis Inacio Lula da Silva, who could not seek re-election after two terms in office, she became Brazil’s first female President in 2010, elected with 56.05% of the vote. She is regarded as a tough manager and her continuation of Lula’s social policies have won her support among the popular classes, but her interventionist policies alienated many in the business community and economic growth slowed during her government. She now says “what is good will continue,

what isn’t will change.”Ms. Rousseff was a left-wing guerrilla in her youth, and was arrested and tortured by Brazil’s then-military dictatorship in the early 1970s. An economist by training, Ms. Rousseff joined the Workers’ Party in 2000. She became Energy Minister in 2003 in Lula’s first government, and was his powerful Chief of Staff from 2005 to 2010. In those positions, she also chaired Petrobras’s Board of Directors.

Economic policy: Ms. Rousseff has not yet published her economic program, but has announced she would change Finance Ministers, indicating an inflection in economic policy. If re-elected, economists expect her to gradually raise prices that have remained frozen in order to keep a lid on inflation, such as gas and energy; seek to gradually reach the middle of the range of 4.5% to 6.5% that the government has set for inflation; return to more

orthodoxy in pushing for a primary budget surplus; and continue to open up infrastructure projects to the private sector while maintaining a role for the state.

Key strengths: Strong voter support from beneficiaries of her government’s Bolsa Familia program and other welfare policies. She also can count on a strong nationwide party apparatus and the power of incumbency.

Key weaknesses: After 12 years in power, the Workers’ Party has lost middle-class support and the economic slowdown and recent corruption scandals involving her party (Ms. Rousseff’s probity has not been questioned) have prompted a groundswell movement in favor of change.

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The three main contenders (cont.)

Marina Silva, Brazilian Socialist Party (PSB)

Though polls show she has a solid chance of being elected, Ms. Silva, 56, is literally an accidental candidate: Having failed in her bid to be a candidate in her own right, she threw her support behind PSB candidate Eduardo Campos in return for being named his running-mate, and only became the party’s candidate when Mr. Campos was killed in a plane crash in August. Her criticism of old-style politics struck a chord with voters and she rose to the top of the polls. Ms. Silva’s biography reads like an inspirational fairy tale that rivals that of Lula’s ascent. One of 11 children born into a

family of rubber-tappers in the Amazonian state of Acre, Ms. Silva did not learn to read or write until she was 16 and later worked as a maid. She began her political life campaigning against deforestation alongside rainforest activist Chico Mendes, who was assassinated in 1988, before becoming a Senator. After joining Lula’s Workers’ Party, she became Environment Minister from 2003 to 2008 (serving in the same government as Ms. Rousseff). Parting ways with Lula and his party, she joined the Green Party in 2009, and ran for President under the Green banner in 2010, finishing a strong third with 19.3% of the vote in the first round.

Economic Policy: Ms. Silva has sought to reassure the business community by advocating a law granting independence to the Central Bank. Her economic advisers have also adopted a tough line on fighting inflation and pushing

for fiscal responsibility – while at the same time Ms. Silva has talked of expanding some existing welfare programs, raising questions on their financing. Moreover, her talk of boosting renewable energies and biofuels and scant mentions of Brazil’s pre-salt oilfields have raised doubts about her energy policies.

Key strengths: Her uplifting life story and call for “new politics” resonates with Brazilian voters and her status as a relative outsider allows her to embody Brazil’s desire for change.

Key weaknesses: A need to reconcile her party’s more pro-business stand with her personal environmental and religious convictions (she is a Pentecostal Christian who is said to read the Bible daily). An untested leader with a small electoral base, she is vulnerable to horse-trading.

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The three main contenders (cont.)

Aécio Neves, Brazilian Social Democratic Party (PSDB)

Like many Brazilian politicians, Mr. Neves, 54, was born into politics. He is the grandson of Tancredo Neves, a prominent figure in Brazil who pushed for a return to democracy under Brazil’s military regime and was elected President in 1985 –only to die of health complications even before taking office. Some say Aécio Neves, who worked alongside his grandfather as a youth, has been preparing all his life to be President. He presents his candidacy as ‘safe change.”Mr. Neves was Governor of Minas Gerais, Brazil’s second-largest electoral college, from 2003 to 2010 and was then elected Senator. As Governor,

he gained a reputation for sound management, slashing some public salaries and cutting his own pay as part of a drive to eliminate the state’s budget deficit. He also received good marks for his state’s education policies.

Economic policy: Mr. Neves is considered the most pro-business of the top three contenders. His economic policy would be a return to the orthodox policies pursued by Brazil’s last PSDB President, Fernando Henrique Cardoso (the father of Brazil’s 1994 economic stabilization plan) and by Lula in his first administration: a “credibility shock” through fiscal responsibility, control of inflation (with a likely lowering of the target over time) and a fluctuating exchange rate. Economists say he would also push for private-sector involvement in infrastructure.

Key strengths: His designation, way ahead of the ballot, of former Central Bank governor Arminio Fraga as his Finance Minister if elected has reassured the business community that he will pursue orthodox economic policies.

Key weaknesses: Lack of national projection and a somewhat stiff style are an obstacle to reaching the runoff. Critics say his economic policies could lead to a recession.

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Thomas KammPartner+55 11 3076 [email protected]

Thomas Kamm is co-head of the São Paulo office. He has extensive experience in diverse aspects of corporate communications, including corporate positioning, media relations, financial communications, M&A and IPOs. Thomas acts as a senior consultant to clients on corporate and financial issues, with a particular emphasis on retail and consumer goods.Thomas joined Brunswick in Paris in 2005, prior to which he worked for 18 years as a foreign correspondent and bureau chief for The Wall Street Journal in Europe, South America – he was based in Rio de Janeiro from 1989 to 1994 - and Africa. Subsequently, he was vice-president for communications and corporate affairs and a member of the Executive Committee of PPR (now called Kering), the French luxury and retail Group.