The Great Debate

from Breakingviews:

Investors cheer for Brazil World Cup rout

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

At the opening of the Confederations Cup in Brasilia a year ago, President Dilma Rousseff was booed by thousands of soccer fans for all of Brazil to see. It’s easy to understand then why she isn’t planning to speak at Thursday’s opening ceremony of the World Cup. An embarrassing turn as host of Earth’s biggest sporting event - or crushing repeat of the 1950 Maracanaço - may be the greatest obstacle to her clinching a second term.

With each dip in Rousseff’s poll numbers, the Bovespa Index kicks up a notch. Investors are hoping her experimental economic policies will come to an end at the ballot this fall.

With unemployment still low and millions of Brazilians lifted out of poverty over the past decade, however, it will take more than a few lousy economic reports between now and then to ensure Rousseff’s defeat. It will take a truly dreadful showing at the World Cup.

While few Brazilians are openly disparaging the home team, that many are privately reflecting on such an outcome is an indication of the malaise infecting Latin America’s largest economy. Inflation remains stubbornly high, hitting 6.4 percent just last week, gross domestic product growth is sluggish and the government’s finances are in bad shape.

Mexico’s reversal of fortune

In Latin America, this looks to be the year of Brazil — thanks to the impending World Cup and presidential elections. But with another lackluster year looming in emerging markets, fans of transformation, growth and investment potential should instead look to Mexico.

Brazil’s president, Dilma Rousseff, is expected to win a second term this year, and its soccer team stands a good shot at victory. But growth has slowed considerably. In the world’s seventh largest economy, reforms are stagnating and the country faces a possible ratings downgrade.

Mexico, by contrast, is in the throes of serious reforms. It will likely lead Latin America with at least 4 percent growth this year and an improving investment outlook. Standard & Poor’s recently boosted Mexico’s credit ratings because of energy reforms that the rating company trumpeted last month as a “watershed moment” for the country. It is becoming a story of inverted fortunes, as Michael Shifter and Cameron Combs of the Inter-American Dialogue recently wrote.

Brazil’s protests are not just about the economy

More than a million Brazilians have taken to the streets this past week in the largest mass demonstrations since the impeachment of President Fernando Collor de Mello in 1992. It began as a modest protest movement in Sao Paulo against a seemingly routine 20 cent bus fare increase, but has quickly transformed into a broader and more diffuse protest against a range of grievances: political corruption; the dismal performance of public services such as transportation, health and education; and even excessive spending in preparation for the World Cup. The mostly peaceful protests have spread to dozens of cities across the country while capturing the world’s attention.

Explanations for this outburst of angst are varied. Some analysts point to Brazil’s economic woes and suggest that two and a half years of low growth, and signs that the consumption-led credit boom is coming to an end, are finally catching up politically, prompting popular discontent. Others see the protests as a manifestation of the government’s inability to meet basic needs, and potentially, as an indication that governance challenges are on the rise in Brazil in a more meaningful way.

All of these explanations have a kernel of truth but are ultimately incomplete. To be sure, the current macroeconomic cycle has generated an environment more prone to discontent, but that doesn’t explain the outburst on the streets. Something deeper and more structural is going on, and it has to do with how a cycle of economic enrichment over the past ten years is changing the public’s expectations of its politicians.