Jose Serra began his campaign for Brazil's president as the clear favorite of financial markets, but his recent heavy hand on economic policy is now raising doubts with many investors. Several investors and political experts told Reuters they are now more wary of Serra than his main rival, ruling party candidate Dilma Rousseff. Serra, a 68-year-old veteran politician from the opposition PSDB party, has concerned many with talk of exerting control over the central bank, cutting interest rates, and boosting the state's role in the economy. The apparent shift in sentiment turns the conventional wisdom in Brazil's presidential race upside-down, and could move currency and debt markets if Serra remains strong in polls as the October vote approaches, investors said. “The financial system secretly prefers Rousseff,” said Tony Volpon, head of Americas emerging market research at Nomura Securities in New York. By most measures, Serra should be the investor favorite. He boasts a doctorate in economics from Cornell University, a laundry list of executive experience, and a party that championed privatization and market reforms under Lula's predecessor, President Fernando Henrique Cardoso (1995-2002). Rousseff, a career civil servant, by contrast, was once an urban guerrilla and never held an elected office before. However, Rousseff has gone out of her way to win over investor support, distancing herself from some of her party's more leftwing proposals. She also pledged to continue the largely market-friendly policies of President Luiz Inacio Lula da Silva that helped fuel Brazil's economy in recent years. “Neither candidate is Wall Street's dream but Serra is the bigger risk. He brings more uncertainty and chance for change,” said Alexandre Barros, a political analyst who followed Serra since they were both student activists in Sao Paulo in 1962. Xico Graziano, a senior aide to Serra, played down the investor concerns, telling Reuters: “Investors know Serra's qualities and how he sees the economy. It's no surprise to anyone.” So far, few investors have been concerned with the Oct. 3 vote, content that neither of the leading candidates is a populist threatening economic stability. But that sense of calm is at risk as the vote grows closer and the candidates more clearly articulate their platforms. Serra this week said that interest rates needed to be cut and that the real was “mega overvalued.” “Regarding Serra there is concern over interest rates and currency, though I do think he'd be tougher on fiscal discipline than Dilma,” said Reginaldo Alexandre, head of the Association of Capital Market Analysts in Sao Paulo. Rousseff has steadily climbed in opinion polls on the back of a booming economy and support from the hugely popular Lula, though she has still not established a clear lead. “The market has not priced in Serra risk because it thinks Rousseff will win,” said Rafael Cortez, a political analyst at Tendencias, one of the country's largest consulting firms. If Rousseff doesn't establish a clear advantage over Serra by August, Volpon said “you could see some pretty violent (market) moves, especially the foreign exchange rate.” Serra has also given mixed signals on the role of the state in the economy. He has criticized the creation of a new state oil company, the use of state funds to build a high-speed train, and pledged to restore powers to industry regulators. But he has also applauded Lula's economic stimulus measures and proposed more state-led economic development. “I favor a national development project for Brazil with government activism,” Serra said. While Serra wants to cut government fat, he also wants to double Lula's flagship welfare program, Bolsa Familia, which many of his supporters criticized for years. Some analysts say Serra's policy mix reflects his campaign strategy. He wants to be seen as proposing change but not abandoning policies that made Lula hugely popular. “Dilma tells the market what it wants to hear. Serra's message is more political because he needs to win votes,” says Dany Rappaport, partner in InvestPort financial consultancy. But Serra has a history of government intervention and is linked to a school of thought that advocates economic planning, a strong state, capital controls and import-substitution. As planning minister, he clashed with the pro-market wing in the Cardoso government and was quickly moved to the health ministry. There he forced Swiss pharmaceutical giant Roche to slash its prices under threat of breaking its patent. “His proposals reflect his beliefs – it's not marketing. But either way it generates uncertainty,” said Barros.
