Brazilian President Dilma Rousseff won’t begin her second term until Jan. 1, but if the first week after her re-election is any indication, the coming four years will be stinkers.

After a bitter campaign, the Workers Party leader made all the right noises, leavening her victory speech with grace notes about “dialogue,” embracing reforms and tackling corruption. The Sao Paulo stock index promptly plunged, rallied, then tumbled again as investors parsed the policy chatter and weighed the chances that she may name a conservative, market-minded executive to replace the divisive lame-duck Finance Minister Guido Mantega.

While speculation centered on some intriguing names ― such as Murilo Ferreira, chief executive of mining conglomerate Vale SA ― the smart money in Brasilia, unfortunately, is on a Rousseff crony.

The shortlist, according to Christopher Garman of Eurasia Group: former Deputy Finance Minister Nelson Barbosa, Central Bank President Alexandre Tombini and president of the powerful National Economic Development Bank, Luciano Coutinho.

The central bank surprised the markets on Thursday by raising interest rates a quarter point, signaling that Brasilia was earnest about reducing inflation, now running stubbornly north of the 4.5 percent target.

The political class was underwhelmed.

Plus, the electronic voting machines had hardly cooled when the leading opposition Social Democracy Party called for an audit of the vote, which Rousseff won by the smallest margin (3.2 percent) in Brazilian electoral history. This came just after the lower house of Congress revolted and overturned an executive decree that called for submitting legislative initiatives to government-sanctioned citizens’ councils for popular consultation. Rousseff’s chief of staff, Gilberto Carvalho, branded the move as sour grapes from “conservatives eager to impose a defeat on the president.”

Senate leader Renan Calheiros of the Brazilian Democratic Movement Party ― part of Rousseff’s ruling coalition ― parried that the upper chamber would also ratify the lower house’s action, dismissing the “conflictive” proposal that the daily O Estado de Sao Paulo has compared to Venezuelan-style command-and-control politics.

During the campaign, Rousseff rallied the rank and file by banking left, predicting that nothing but hardship would come from the proposed reforms of challenger Aecio Neves. “You people like to cut, cut wages and employment,” she said, creating an instant campaign meme.

If Chinese leaders have mastered the art of extolling socialism and then embracing capitalism, Rousseff apparently faces the opposite dilemma, as economic journalist Carlos Alberto Sardenburg put it: How to keep to the left while head-faking right.

But where, exactly, is Rousseff now veering? The government has little crawl space. Tax breaks meant to goose growth have largely flopped, leaving the economy flat and the treasury with a tax shortfall of around R$100 billion ($42 billion) this year, according to Valor Economico newspaper. Brazil posted its worst budget deficit in 27 years Friday.

Until now, Brazil’s neediest have been spared in the downturn, thanks to a broad safety net and a generous minimum wage policy ― with raises pegged to prior economic growth plus cost of living ― drafted when times were flush. With gross domestic product set to expand by just 0.3 percent this year, there’s little bonanza to share, and yet the government is locked into a wage increase of 8.8 percent next January, which will add another $9 billion to public spending. The wage trigger is set to expire next year.

Rousseff’s conciliatory nod to markets will mean little if she continues sitting on utility rates, subsidizing gasoline and dumping dollars to prop up the battered real. But don’t expect policy “shock and awe,” said Eurasia Group’s Garman, in a note to clients. Look instead for feijoada: Brazil’s familiar “heterodox” policy stew, including a “mild fiscal adjustment” with taxes and credits instead of budget cuts, according to Alberto Ramos of Goldman Sachs.

That’s the fare that has kept voters, if not entirely contented, at least accommodated enough to return Rousseff to power. But Brazilians want to have their feijoada and eat it, too.

Whether odd policy tweaks and the new political contrition are enough to restore confidence and set the economy right is unclear, but that’s for another election.

By Mac Margolis

Mac Margolis is a Bloomberg View contributor in Rio de Janeiro. He has reported on Latin America for Newsweek and contributed to the Economist, the Washington Post and Foreign Policy. He wrote “The Last New World: The Conquest of the Amazon Frontier.” ― Ed.

(Bloomberg)