Brazil's economy faces trouble after World Cup, election

Wed Mar 12, 2014 7:06am EDT
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By Brian Winter and Silvio Cascione

BRASILIA (Reuters) - With the World Cup in June and July and a presidential election in October, many Brazilians aren't thinking beyond 2014. But next year is likely to be memorable for all the wrong reasons in Latin America's biggest economy.

President Dilma Rousseff, or whoever wins the election, will have to make deep budget cuts, raise taxes and take other painful steps to address Brazil's growing financial imbalances.

The fallout will likely be more damaging than many investors anticipate, resulting in a fourth straight year of disappointing growth - a big fall back to earth for a country that last decade was one of the world's most dynamic emerging markets.

Economists currently expect Brazil's gross domestic product to grow 1.68 percent this year, and 2 percent in 2015, according to a weekly survey by the central bank. Yet the latter forecast is somewhat misleading, because many economists admit their estimates are based on computer models that don't fully account for what politicians will do after the election.

"No matter who wins (the election), it's going to be a difficult year, worse than many believe," said Fernando Henrique Cardoso, who was president from 1995 to 2003 and still retains considerable influence in financial circles as a leader of the main opposition party.

An official close to Rousseff, speaking on condition of anonymity, broadly concurred: "Few people are talking about 2015 right now. But it will be hard, no doubt."

The biggest and most disruptive task will be trimming Brazil's fiscal deficit, which investors and ratings agencies say has been too high in recent years.

No one expects Rousseff, a pragmatic leftist, to make painful budget cuts while campaigning for re-election. As a result, the cuts will need to be even deeper when the next presidential term begins on January 1, 2015 - especially if Brazil's sovereign credit is downgraded in the interim by Standard & Poor's to its lowest investment-grade rating, as many in Brasilia now anticipate.   Continued...

Brazil's President Dilma Rousseff reacts during a press statement after a meeting at the 6th European Union (EU)-Brazil summit at the Planalto Palace in Brasilia January 24, 2013. REUTERS/Ueslei Marcelino (Brazil - Tags: POLITICS) - RTR3CWET