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Friday, 27 September, 2002, 07:19 GMT 08:19 UK
Brazil's election spooks investors
Luiz Inacio Lula da Silva
Why does a possible win by Lula scare investors?

Whoever wins Brazil's presidential race on 6 October will find that many of the country's economic policies have already been set in motion by the International Monetary Fund (IMF).

Nevertheless, the election promises to raise a few pulses as the current frontrunner does not see eye to eye with Brazil's foreign investors or the IMF.

Panicked trading in the summer has already demonstrated how concerned investors have become about a change of president for this major Latin American economy.

The former left-wing firebrand Luiz Inacio Lula da Silva of the Workers' Party, who is currently tipped to win, has emerged as the investors' chief bogeyman.

Mr Popular

In the closest presidential contest since Brazil returned to democracy in 1985, the unionist turned besuited statesman has been riding high in the opinion polls.

A trader at the BM&F futures and commodities market in Sao Paulo
Concerns about Brazil have hit the financial markets
His success to date comes on the back of popular discontent with the ruling party, led by President Fernando Henrique Cardoso.

But Mr Da Silva's popularity has caused panic in financial markets, prompting the currency to collapse by a third this year and raising the possibility of a default on about $260bn of debt.

In August the IMF stepped in with a $30.4bn bail-out package, its biggest ever and with more than the usual strings attached.

And most of the money is not available until after the elections.

Job hopes

The main issue for Brazilians in the election is unemployment - and opinion polls show voters believe Mr da Silva is the most likely candidate to solve it.

Jose Serra
Mr Serra is lagging in the polls
It has been one of Mr da Silva's main platforms, and in a swipe at his rivals, the former steelworker has stressed that only a person who has been unemployed would understand the issue.

Two-fifths believe Mr da Silva can tackle the issue, while only 18% have faith in the ability of President Cardoso's hand-picked candidate Jose Serra to solve it.

Under Mr Cardoso's free-market policies, unemployment has risen from 4.2% when he took office in 1995 to the current 8.2%.

Sovereignty issue

But the winning candidate will find it difficult to solve the problem because of IMF commitments to maintain an budget surplus of 3.75% through to 2005.

The leading candidates have already complained about what they perceive as the IMF undermining sovereignty and dictating policy.

But the penalty for not following the IMF's dictates are evident next door in Argentina, which had its credit line cut after defaulting on its debts.

The impact of IMF belt-tightening policies also means incredible deprivation for millions of people who have no social security safety net.

Business vote

Despite Mr da Silva's success in the pre-election polls, he is not universally popular at home.

Peterson Rosa of Brazil rides a wave at the Figueira Pro surfing men's competition
The course of Brazil's economy needs careful steering
Those in the Brazilian and international business community see the former left-wing firebrand as a direct threat to the free-market restructuring that has occurred under President Cardoso.

Mr da Silva's success has caused investors to flee Brazil because of his opposition to taking further IMF money and rejection of free-market policies.

Although, he has made some effort to accommodate the right by taking on a centre-right textile magnate Jose Alencar as his running mate, most business executives have lined up behind Mr Serra.

The business community believes Mr Serra, the former health minister, will continue President Cardoso's market-oriented policies.

Industrial gripes

One business area where Mr da Silva has managed to garner some support is industry.

Not all business figures have been impressed with President Cardoso's handling of the industrial sector, believing that it has been neglected in favour of the banking sector.

In recent years, the banks have made super profits from the country's high interest rates and volatile currency.

Brazil also has deep financial ties to the US, where banks such as like Citigroup have an exposure of about $25bn in outstanding loans.

Mr da Silva, however, has pledged to cut taxes for industrial production and exports, while promising higher taxes for financial and speculative interests.

Threat to trade pact

In another departure from the incumbent government, Mr da Silva has been lukewarm in his support for the Free Trade Area of the Americas (FTAA).

Brazil and the US co-chair the FTAA - negotiations for which are due to begin in November.

Mr da Silva has expressed concerns that the FTAA could damage Brazil's industry and agriculture sectors.

Some 98% of the 10 million Brazilians who took part in a symbolic referendum rejected Brazil's participation in a hemisphere-wide free trade area.

Facing reality

To some extent, international investors are slowly acclimatising to the idea of Mr da Silva as Brazil's new president.

Discreet inquires are even being made about who would be on his economics team.

Meanwhile, the US has made soothing utterances, with Trade Representative Robert Zoellick predicting a "good working relationship" with whoever turns out to be the next president.

But no matter who wins the election, shaping Brazil's economic course will require some tough decisions if the country wants to keep its foreign investors on side.

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See also:

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