BRASILIA, Brazil (Reuters) - After eight years of unprecedented stability under President Fernando Henrique Cardoso, Brazil enters uncertain political territory in 2002 with what is expected to be the Latin giant’s most hotly disputed elections since the 1980s. The October presidential vote to replace the only Brazilian leader in history set to complete two full terms will come as neighbour Argentina, which enacted similar deep free-market reforms to Brazil in the 1990s, is ravaged by political and financial chaos.

Analysts say candidates’ chances of success will ultimately depend on the health of Brazil’s economy, Latin America’s largest. But Argentina’s institutional crisis could work against the candidate for change, namely Luiz Inacio Lula da Silva, or ‘Lula’ of the opposition leftist Workers Party, who is leading in the polls with 30 percent of the vote in his fourth bid to preside over 170 million people.

“I suspect that Argentina’s problems will make Brazilians more conservative and mindful on who they think can best manage the economy in difficult times,” said analyst Sherman Katz from Washington’s Center for Strategic and International Studies.

The beneficiary of a more conservative voting strategy will be the man, or woman, chosen to carry on the torch for Cardoso’s free-market, centre-right coalition. Brazilians may be disappointed with the scant progress made against corruption and one of the worst income distributions in the world in the last eight years. But Cardoso delivered what previous governments could not — an end to inflation, control over state spending and even some successful privatisations.

The economy, however, is not everything the Cardoso administration hoped it would be in election year. At the beginning of 2001 Brazil’s economy hurtled into a downward spiral with the real currency being pushed sharply lower due to concerns over spill-over from Argentina. That forced the Central Bank to hike interest rates, choking growth and increasing Brazil’s large debt load, much of which is pegged to the currency and rates.

A severe energy crisis due to the worst drought in decades added to the poor prospects in early 2001. Economic growth for 2001 is expected to come in at two percent, less than half of the growth rate in 2000, and maintain that pace in 2002.

But Brazil’s economy and financial markets performed admirably at the end of the end of the year, even as Argentine President Fernando de la Rua resigned and the neighbouring country declared a moratorium on its $132 billion debt load. A recovery in Brazil’s beleaguered real currency in the last weeks before Christmas and Cardoso’s relaxation of stiff energy rationing to cope with the power shortages could still favour the government’s candidate. The country has also met strict fiscal goals agreed with the International Monetary Fund (IMF), making it a pet pupil held up by the IMF for other emerging markets to follow.

While the economy is shaping up, the electoral equation is still missing around 50 percent of the formula — a government candidate.

“The race hasn’t even begun yet because we don’t have the key element in the contest: the definition of the government’s candidate,” said Valeriano Mendes Ferreira Costa, a political science professor at Campinas University in Sao Paulo state.

Jose Serra, the current health minister, is tipped to vie for president for Cardoso’s Brazilian Social Democratic Party (PSDB) but he has yet to officially throw his hat in the ring. Serra languishes in the polls below ten percent although he won accolades at home and abroad for standing up to drugs firms to win cheaper medicines for Brazil’s acclaimed AIDS programme, which provides the anti-AIDS cocktail free to all.

The tenacious health minister could be catapulted by the simple declaration of support from his president. But Cardoso is measuring his actions carefully, worried about making a misstep before the party convention, expected in February.

At the same time, a meteoric rise through the polls of 48-year-old Maranhao state Gov. Roseana Sarney is shaking the foundations of Cardoso’s four-party governing coalition and upsetting his electoral battle plan. She is from the conservative Liberal Front Party (PFL), one of the coalition partners, and daughter of former president Jose Sarney, whose family has ruled the poor but emerging northeastern state for almost four decades.

Thanks to a well-orchestrated media blitz, using nearly all the free air time of her party, Sarney rose from nowhere to gain more than 20 percent in the polls and add a new twist to Brazil’s male-dominated political picture. Representing a break with tradition, Sarney’s rise is being closely watched and increases the PFL’s power.

“The PFL’s strategy of raising Roseana Sarney’s visibility in the media was successful, increasing the party’s bargaining position in the negotiations to form the government coalition ticket for next year’s campaign,” said Constantin Jancso, an economist at MCM consultants in Sao Paulo.

Sarney’s sudden fame has led analysts to liken her to the dashing Fernando Collor de Mello, also from a little-known northeastern state, who snatched the presidency in 1989 against Lula, only to resign in 1992 to escape impeachment on corruption charges. Sarney has yet to confirm she wants to run, but she is mentioned increasingly in Washington and on Wall Street.

The question now is if Serra, if his candidacy is confirmed, can win sufficient backing to convince the PFL to relinquish its shot at the presidency with Sarney and rally behind the PSDB to ensure victory over Lula. Serra “has an image problem but nothing that can’t be resolved with marketing”, said Ferreira Costa.

“Basically, Roseana’s electorate is Serra’s electorate.”

If Serra fails, however, the election could prove to be even more of a cliff-hanger as Cardoso’s coalition cracks after almost eight years of continual cross-party concessions. What seems certain in the sea of uncertainties is that the vote will go to a run-off round in November between the top two finishers to decide who will take office on January 1, 2003. And in between then and now, voters and investors had better tighten their belts for the bumpy ride.