Global Insight Perspective

Significance

Despite the ongoing corruption scandals, President Luiz Inácio Lula da Silva has made a strong recovery in the polls since December 2005, providing a reminder to the opposition that he remains a strong contender in the October 2006 presidential elections.

Implications

Although Lula has denied charges of electioneering, recent announcements of a minimum wage increase, new investments in infrastructure projects and the publicity he has given to Brazil's decision to repay its debt to the International Monetary Fund (IMF) suggest that the government has tried to promote positive news in the wake of the negative December poll results.

Outlook

The next few weeks are likely to see intense jostling within and between parties as potential presidential candidates compete for support ahead of the Brazilian Social Democratic Party (PSDB) and Brazilian Democratic Movement Party (PMDB) party primaries and parties seek to broker electoral alliances at both the state and federal levels. Lula's recovery in the polls will increase pressure on the PSDB to unite behind a single candidate and will improve the chances of the ruling Worker's Party (PT) being able to broker electoral alliances with smaller parties.

Poll Shows President with 10% Lead over São Paulo Mayor in Second-Round Vote

Yesterday's release of the latest poll, conducted by Sensus for the National Confederation of Transport (CNT), has brought good news for the government. The poll showed President Luiz Inácio Lula da Silva in a technical tie with the former presidential candidate of the Brazilian Social Democratic Party (PSDB), São Paulo Mayor José Serra, in a first-round vote and with a 10% lead in a second-round vote. President Lula had 47.6% of the intended vote against 37.6% for Serra. The poll, conducted between 6 and 9 February 2006, had a margin of error of 3%.

For months, President Lula was consistently the clear favourite to win the 2006 presidential elections, but a government corruption scandal that emerged in June 2005 led to a fall in his popular approval ratings and damaged his prospects for re-election, should he choose to stand. Polls conducted in August 2005 showed for the first time that he would lose to Serra in a second-round vote. The ongoing corruption scandal and disappointing third-quarter 2005 GDP results contributed to a further fall in his ratings in late 2005, and two December polls showed for the first time that Lula could lose the elections to Serra in the first-round vote (see Brazil: 15 December 2005: President's Electoral Prospects Weaken with Ongoing Scandal in Brazil). Two polls released earlier in 2006 showed Lula recovering ground, but with Serra still in the lead in the second round. The latest poll is the first in seven months to show Lula ahead of Serra in the second round.

Recovery Despite Ongoing Scandal Reflects Minimum Wage Increase and Public Spending Announcements

Lula's recovery in the polls comes despite the ongoing news coverage of congressional investigations into corruption, which have not implicated him personally, but have touched a number of people close to him. The negative effect of the government corruption scandal on Lula's ratings continues to be felt, judging by the 27.3% of those polled who said that they would not vote for Lula because of his failure to combat corruption. However, it was the economy rather than corruption that was the more important factor for those who would vote against Lula. Meanwhile, the perception that Lula would be the candidate most likely to look after the poor appeared to be the most important factor for those who said that they would vote for Lula.

Lula's recent rise in the polls will be seen as a particular blow to the PSDB, since January saw Governor of São Paulo Geraldo Alckmin reaffirm his pre-candidacy for the October 2006 presidential elections and this month was marked by former president Fernando Henrique Cardoso (1994-98, 1998-2002) launching a particularly scathing attack against the government (see Brazil: 8 February 2006: Former Brazilian President Accuses PT Government of Systematic Corruption and Brazil: 18 January 2006: Former Rio Governor to Dedicate Himself to Bid for Nomination as PMDB Presidential Candidate). Lula's rise will therefore be a reminder that he is a stronger potential candidate than the opposition might have hoped and that there might be a limit to the amount of political capital that can be made out of playing the corruption card, especially when Cardoso's two administrations also had their share of corruption scandals. At the same time, this week's local press coverage of the 26th anniversary celebrations of the ruling Worker's Party (PT), which criticised the party for the absence of any mention of the crisis, is a reminder that despite the latest poll results, any sign of complacency by the president and his party on this matter could reflect poorly on future polls.

Lula's recovery also suggests that an increase in his public appearances and interviews since the December polls, some of which have been criticised by the opposition as 'electioneering', combined with the cumulative effect of a number of 'positive' announcements made by the government over the past few months, could be helping to lift his ratings. The 'positive' news includes the following:

Finance Minister Antonio Palocci's announcement of a package of tax incentives designed to boost construction activity and increase home ownership and his earlier announcement of a project to reduce taxes for foreign investors (see Brazil: 8 February 2006: Incentives Announced in Brazil to Boost Construction Activity).

The announcement of plans to increase the minimum wage by 17% to 350 reais (US$163) per month in 2006 (see Brazil: 25 January 2006: Government of Brazil Allegedly Set to Increase Minimum Wage by 17%).

Several 'positive' economic data releases for industrial production, retail sales and unemployment, combined with the decision of the central bank's monetary policy committee (Copom) to cut interest rates again in January, which point to an improved economic outlook since the third quarter of 2005, although the economy remains quiet sluggish (see Brazil: 27 January 2006: Unemployment Drops to 8.3% in December in Brazil and Brazil: 19 January 2006: Central Bank Announces Fifth Consecutive Rate Reduction in Brazil).

The government's emphasis on other 'successes' such as its biofuels programme and state oil company Petrobras's closeness to achieving oil self-sufficiency, even though much of the groundwork for Petrobras's production increases over the past year was laid by the previous government.

The announcement of planned investments in road and energy projects (see Brazil: 4 January 2006: Brazilian Government Launches Infrastructure Projects for 2006).

Brazil's decision to cancel its debts with the International Monetary Fund (IMF) two years early and to pre-pay its Paris Club debts (see Brazil: 11 January 2006: IMF Lauds, Cajoles Brazil at Debt Paydown Celebration, Brazil: 21 December 2005: Brazil to Pre-Pay Paris Club Debts in Addition to IMF and Brazil: 14 December 2005: Brazil Pre-Pays US$15.5-bil. Debt to IMF).

Extraordinary Session of Congress Closes

In other news, an extraordinary session in both houses of Congress approved in December came to an end yesterday with the promulgation of a constitutional amendment reducing legislators' 90-day holidays to 55 days and another ending the payment to legislators of additional salaries during extraordinary sessions. However, the promulgation of another amendment ending the so-called 'verticalisation' of parties - an electoral rule that required parties forming alliances at the national level to back the same presidential candidate to form the same party alliances at a local level - was delayed until after a judgement from the Supreme Electoral Court on whether the new rules would apply to this year's elections (see Brazil: 9 February 2006: Legislators Vote on Political and Electoral Reforms in Brazil). Despite the flurry of activity seen in both houses in the past week or so, legislators have attracted considerable public criticism for their low attendance during the session, which has cost the public purse almost 100 million reais, and their consequent failure to complete voting on several key issues, including the 2006 federal government budget and the cases of all deputies facing possible impeachment. Congress's failure to approve the budget, which is normally through by the end of December, led to warnings earlier this month by Planning Minister Paulo Bernardo that without the budget, the government would have difficulties in making investments from April or May, after funds carried over from the previous year were exhausted.

Outlook and Implications

Brazil's current hostile political environment, due to the weakening of the government over the corruption scandal and the forthcoming elections, was highlighted by 2005 being the first year in six that the federal government did not manage to have its budget through Congress before the end of December. The government is expected to make little progress on its reform agenda in Congress during 2006. Although the government had the most controversial reforms out of the way in its first two years, it had planned to tackle other priority reforms such as political, trade union, regulatory and value-added tax (VAT) reforms. Instead, the ruling PT will be counting on other areas that do not require congressional approval to strengthen President Lula's chances of winning re-election in October, should he choose to stand, including well-publicised infrastructure investments, positive results from social projects such as Bolsa Familia and a strengthening of the economy. The government already appears to be employing this strategy in the first month and a half of 2006. The appearance of increased activity by the government despite the inactivity of Congress is helping to lift its popular approval ratings. This pattern is likely to be replicated in the remaining months before the official campaign kicks off. Meanwhile, President Lula's rise in the polls will increase pressure on the PSDB - expected to be the PT's main opponent in the forthcoming presidential race, although not its only one - to unify behind a single candidate quickly, be it Serra or Alckmin, so that it can intensify efforts to reverse Lula's recent gains in the polls.

Contact: Raul Dary

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Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

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