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Brazil: Lula passes first test but tough decisions lie ahead

If investors famously have very short memories, it seems that voters’ memories are even shorter.

 Less than a year after a series of corruption scandals threatened to bring down the Lula government – and opposition parties held their fire on the theory that a devastated Lula administration would only increase their chances in the presidential election on October 1 – Lula looks set to waltz back into power for a second term, quite possibly with an easy first-round victory. Part of the reason for his electoral success will be the fact that for all the political noise surrounding his administration, the Brazilian economy has done remarkably well under his tenure. Spreads on Brazil’s sovereign debt have come down from the quadruple figures to just 220 basis points over Treasuries, and with an upgrade from Moody’s in August, all three major credit rating agencies now put Brazil at the BB level, just two notches away from investment grade. The central bank has managed to keep inflation under control – albeit with very high interest rates – and foreign investment has been pouring into the country so fast that foreign reserves are likely to end the year at the $100 billion mark, even after $14.5 billion in prepayments to the IMF and billions more spent on buying back Brazil’s dollar-denominated bonds.

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