Domestic Politics Crib Sheet: Social Tensions On The Rise

Signs of further social unrest are beginning to crop up just as Brazil's 2014 general election is starting to heat up, reinforcing our core view that while President Dilma Rousseff is the candidate best positioned to win the presidency in October, she will face a number of headwinds in the coming months. Indeed, rolezinhos - gatherings that are advertised through social media and attract youths who are often from poor neighbourhoods - have started to grab both domestic and international headlines in recent months. Generally taking place in or outside of major shopping malls, they have seen malls hire private security, fearing that the gatherings could deter the malls' middle and upper middle class clientele, or even erupt in violence or looting. We believe that tensions between youths and hired guards or police could be a flashpoint for protests in the coming months.

In addition, we have seen protests that echo those that occurred in June 2013 ramp up in recent weeks. Notably, a TV cameraman died during a street protest against bus fare hikes in Rio de Janeiro, the same issue that sparked widespread demonstrations in June 2013. We believe that an increasingly violent handling of protests by police could serve as another catalyst for a more widespread protest movement, particularly given that a number of the structural issues protestors identified last year persist, namely the poor quality of public services, the high cost of living, and a lack of government transparency. The re-emergence of national protests would likely see a significant drop in the polls for Rousseff, who is favoured to win given strong polling numbers and a somewhat fragmented opposition. Furthermore, mass social unrest would likely galvanise the positions of opposition candidates, posing risks to our view that the incumbent remains likely to win re-election this year.

Latest Developments

  • Battle Lines Being Drawn For October Election: A number of recent developments indicate that the 2014 election race continues to heat up. First, with most of the major presidential tickets set, we expect that opposition candidates will increasingly challenge President Dilma Rousseff's re-election bid, and anticipate that the polls will tighten somewhat in the next few months. While we believe Rousseff remains the candidate best positioned to win, we expect that she will face a number of headwinds in the coming months. Second, Rousseff completed an initial cabinet reshuffle in late January. Not only is Rousseff seeking to ensure that she has the strongest possible team, she also needs to shore up political alliances - coalition partner Partido do Movimento Democrático Brasileiro has been particularly demanding in recent weeks - to give her the best possible chance of winning in the first round of the October election. Brazil's relatively fragmented political system makes forming alliances with smaller parties essential.

  • Signs of Social Fabric Fraying: While we have yet to see widespread protests as in June 2013, social tensions are on the rise. Indeed, beginning in late December, a number of rolezinhos began to grab media headlines, highlighting the country's significant socioeconomic divide. Furthermore, we have seen protests arise that address some of the same issues as those that occurred in June 2013, such the poor quality of public services and as high living costs.

Domestic Politics Crib Sheet: Social Tensions On The Rise

Signs of further social unrest are beginning to crop up just as Brazil's 2014 general election is starting to heat up, reinforcing our core view that while President Dilma Rousseff is the candidate best positioned to win the presidency in October, she will face a number of headwinds in the coming months. Indeed, rolezinhos - gatherings that are advertised through social media and attract youths who are often from poor neighbourhoods - have started to grab both domestic and international headlines in recent months. Generally taking place in or outside of major shopping malls, they have seen malls hire private security, fearing that the gatherings could deter the malls' middle and upper middle class clientele, or even erupt in violence or looting. We believe that tensions between youths and hired guards or police could be a flashpoint for protests in the coming months.

In addition, we have seen protests that echo those that occurred in June 2013 ramp up in recent weeks. Notably, a TV cameraman died during a street protest against bus fare hikes in Rio de Janeiro, the same issue that sparked widespread demonstrations in June 2013. We believe that an increasingly violent handling of protests by police could serve as another catalyst for a more widespread protest movement, particularly given that a number of the structural issues protestors identified last year persist, namely the poor quality of public services, the high cost of living, and a lack of government transparency. The re-emergence of national protests would likely see a significant drop in the polls for Rousseff, who is favoured to win given strong polling numbers and a somewhat fragmented opposition. Furthermore, mass social unrest would likely galvanise the positions of opposition candidates, posing risks to our view that the incumbent remains likely to win re-election this year.

Latest Developments

  • Battle Lines Being Drawn For October Election: A number of recent developments indicate that the 2014 election race continues to heat up. First, with most of the major presidential tickets set, we expect that opposition candidates will increasingly challenge President Dilma Rousseff's re-election bid, and anticipate that the polls will tighten somewhat in the next few months. While we believe Rousseff remains the candidate best positioned to win, we expect that she will face a number of headwinds in the coming months. Second, Rousseff completed an initial cabinet reshuffle in late January. Not only is Rousseff seeking to ensure that she has the strongest possible team, she also needs to shore up political alliances - coalition partner Partido do Movimento Democrático Brasileiro has been particularly demanding in recent weeks - to give her the best possible chance of winning in the first round of the October election. Brazil's relatively fragmented political system makes forming alliances with smaller parties essential.

  • Signs of Social Fabric Fraying: While we have yet to see widespread protests as in June 2013, social tensions are on the rise. Indeed, beginning in late December, a number of rolezinhos began to grab media headlines, highlighting the country's significant socioeconomic divide. Furthermore, we have seen protests arise that address some of the same issues as those that occurred in June 2013, such the poor quality of public services and as high living costs.

Core Views

  • Re-Election No Walk In The Park: Although Rousseff remains the candidate best positioned to win the 2014 presidential race, we believe that with the government facing fiscal pressures, inflation still elevated, growth likely to remain weak in the next 12 months, and a new opposition alliance changing the dynamics of the race, support for the president could wane in the coming months. In particular, these factors, combined with an uptick in public unrest should the government fail to make adequate headway on promised reforms, could see Rousseff's approval ratings head back towards their June 2013 lows.

  • Public Unrest To Persist: Nationwide protests in June marked the beginning of a more politically proactive electorate. Rising incomes have seen the middle class grow over the last decade, and we believe that these citizens will be less willing to accept the current status quo, including a high cost of living and poor social services going forward. Until we begin to see fundamental reforms to these issues, as well as greater government transparency, we foresee potential for further instances of significant public unrest.

  • Economy Key For Policymakers: With Brazil's economy struggling to recover after a significant slowdown beginning in 2011, the government's current consumption-led growth model running out of steam, and a number of business environment challenges keeping investors wary in an environment of lower returns, we believe that the economy will remain a major focus of policymakers in the coming years.

  • Security Issue Not Going Away: The Brazilian government's continued attempts to 'pacify' Rio de Janeiro's favelas and cut down on crime in São Paulo in advance of the 2014 FIFA World Cup and 2016 Olympic Games will see violence remain a prominent domestic issue, as police increasingly come into conflict with the country's most formidable gangs. We believe that current criminal interests are likely to remain entrenched despite these efforts. However, we do not expect violence to mar the upcoming high profile sporting events.

Risks To Outlook

  • Rousseff The Reformer: With the Partido Socialista Brasileiro (PSB) and Partido da Social Democracia Brasileira (PSDB) criticising the current economic policies, international investors cautious of Brazil's business environment, and domestic business interests wary of domestic growth prospects, Rousseff could make a concerted reform push. Congressional support would be her biggest hurdle, but a demonstrated effort to cut down on red tape, improve the quality of social services, and make difficult choices about public spending could see support for the president rise back towards its recent highs.

  • Recovery Bolsters Rousseff: Should inflation continue to moderate, consumer confidence pick up, and fixed investment rebound as construction of previously-delayed projects gets underway, economic activity could surprise to the upside next year. Such a scenario could help bolster the president's economic credentials and take some of the fodder away from her opponents, boosting her polling numbers.

  • PSDB-PSB Alliance: The centrist PSDB and the left-wing PSB could forge an opposition alliance, likely underpinned by some common ground on economic issues, helping to bring together the anti-Rousseff vote. Indeed, PSB president Eduardo Campos and his PSDB counterpart Aécio Neves have previously discussed policy issues and potential alliances for individual races, which have fuelled rumours that they could combine forces at some stage. Such a move would likely come in the event that the PSB-Silva alliance fails to stick, or if either a PSDB or PSB candidate makes it into the second round.

Key Research:

Opposition To Increasingly Challenge Rousseff's Re-Election Bid, December 20 2013

Silva-PSB Alliance: A Potential Game Changer, October 10 2013

Significant Challenges Lie Ahead For Rousseff, September 23 2013

Public Unrest: Assessing The Policy Implications, June 20 2013

Economy To Dominate Medium-Term Policymaking, May 10 2013

Rousseff Shoring Up Alliances Ahead Of Re-Election Bid, March 22 2013

Rising Violence Highlights Operational And Security Risks, January 17 2013

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