Rousseff takes over booming Brazil, tests await

* Currency war, inflation, state reform main challenges

* Tax overhaul seen as big test of support in Congress

* Expect more realistic foreign policy under Rousseff

By Raymond Colitt

BRASILIA, Jan 1 (BestGrowthStock) – When Dilma Rousseff is sworn in
on Saturday as Brazil’s next president, she will take the reins
of an emerging giant with a booming economy, vast new oil
reserves and growing international diplomatic clout.

But for Brazil to remain one of the world’s hot spots, the
former Marxist guerrilla must trim a costly state budget, cut
red tape and contain a currency rally that is harming
industry.

As a trained economist and efficient manager, the first
woman to become Brazil’s president has more theoretical than
practical know-how. Her biggest challenge will be to sell
unpopular measures, such as spending cuts and wage caps, to
voters whose lives have improved considerably in the last
decade.

More than 20 million people emerged from poverty thanks to
economic growth and innovative social welfare policies under
President Luiz Inacio Lula da Silva. Salaries are up,
unemployment is at a record low, and a growing middle class is
buying cars and TVs at a break-neck pace.

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Political risks in Brazil: [ID:nRISKBR]

Special report on Rousseff: http://link.reuters.com/fab25p

Factbox on cabinet members: [ID:nN29258362]

Graphic on economic growth: http://link.reuters.com/huf64p

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Rousseff, who appointed an experienced and respected
economic team, will maintain the mostly market-friendly
policies that put Brazil on investor radar screens.

When her motorcade passes Brasilia’s modernist government
buildings in a convertible 1953 Rolls Royce flanked by female
security guards, many Brazilians will be there to salute their
outgoing, not their incoming president.

Rousseff owes her October election victory to the backing
of her mentor, Lula, who leaves office with a sky-high approval
rating of nearly 90 percent.

Lula’s charisma and popularity were fundamental for the
former union leader to master volatile support in Congress and
weather a series of corruption scandals, one of which brought
him to the brink of impeachment proceedings in 2005.

Rousseff, a wonkish technocrat whose speeches often become
bogged down in numbers, will require much skill and backing to
deal with often unruly political allies.

“The question is whether she has the courage and support to
stand up to vested interest,” said Pedro Simon, Senator for the
PMDB party, the largest in Rousseff’s coalition. “There’s
already an army of scoundrels wanting the victory spoiled.”

One of the first tests of her 10-party coalition will be a
major tax overhaul she plans to send to Congress early on.

Rousseff will also have to rein in inflationary public
spending and cut taxes that are the highest of any major
emerging market and are choking business.

The global currency war, which is undermining domestic
industries with cheap Chinese imports, will test the closer
ties Lula has forged with Beijing and other BRIC countries.

Beyond short-term solutions to the currency issue, such as
capital restrictions and tariff barriers, Rousseff faces a long
list of challenges. Chief among them: Upgrading decrepit roads
and ports, and slashing Brazil’s notorious bureaucracy and
double-digit interest rates.

HEAVY GOVERNMENT HAND

Lula’s former chief of staff and energy minister will wield
a heavy government hand in several sectors of the economy,
particularly the oil industry. Developing vast, new offshore
oil reserves spells huge opportunities for more wealth and jobs
but risks sidelining private capital and technology.

So far, Rousseff has shown little interest in cutting
costly pension benefits, relaxing rigid labor laws or reducing
the size of the state — all seen as key if Brazil is to keep
growing at a rapid pace.

Given the many demands at home, she is likely to take a
lower international profile and avoid tackling political hot
potatoes like Lula did when he angered Washington with
mediation efforts over Iran’s nuclear program.

Rousseff has signaled she wants to warm ties with the
United States and has distanced herself from Iran, harshly
criticizing Tehran’s human rights record. [ID:nN02226153]

Washington will be one of her first foreign destinations, a
a close aide said this week, and U.S. Secretary of State
Hillary Clinton is among the 31 foreign dignitaries attending
the inauguration ceremony.

“With Rousseff, foreign policy will be less ideological,
more pragmatic,” said Alcides Costa Vaz, professor of
international relations at the University of Brasilia.

“Brazil will continue to strive for a bigger role on the
world stage but will be more aware of its limitations.”

(Editing by Todd Benson and Sandra Maler)

Rousseff takes over booming Brazil, tests await