Down to the wire: the clock is ticking for Lula's team as elections near and growth sputters.

Markets have short memories. The electorate does not. Both are big worries for President Luiz Inacio Lula da Silva.

After taking office in January 2003, Lula was the toast of global investors. By putting fiscal responsibility above the ambitious social pledges of his campaign, the former union leader proved to markets his left-wing government was serious about getting the Brazilian economy on the right track.

Demand for Brazilian stocks and bonds, in turn, grew steadily during the first 15 months of his tenure.

But that was before U.S. interest rates started to rise, making emerging markets less attractive. Or oil prices began to soar, stirring fears of inflation. Or the Chinese government--itself wary of inflation--decided to lend less money to the country's ravenous consumers, slowing imports of steel, soybeans and other Brazilian commodities.

While beyond the control of the Brazilian government, such news this year put a drag on last year's optimism. Stocks and bonds have sagged since spring. The LATIN TRADE Consensus Forecat predicts Brazil will end 2004 at 3.8%, dropping to 3.5% in 2005.

And the foreign banks that once praised Brazil are now raising flags about the outlook for Latin Americas largest economy. As early as April, when the threat of higher U.S. interest rates first began to sour the appeal of Brazilian bond notes, J.P. Morgan--in a move soon mirrored by other major investment banks--began downgrading the country's debt ratings.

Then there are the concerns among Brazilians themselves. Business people see a lack of agility in the government's monetary policy. Inflation is under control, but the government has been loath to lower interest rates to spur consumer demand. The reluctance, critics say, is preventing the country's slowly-growing economy from really taking off.

What's more, the government's commitment to control spending is limiting its own ability to invest in the Brazilian economy. Nearly halfway into its four-year term, the government faces a dilemma that has come to define the Brazilian economy under Lula: Is it possible to foster growth while maintaining fiscal responsibility?

"The government now really has something to prove," says Maurice Costin, a director of the Sao Paulo Stare Federation of Industries, one of Brazil's most influential business organizations. "There was success in the fight against inflation and the fight to control government spending, but the real success will come by creating jobs and consumer demand."

At issue, of course, is how. Lower interest rates remain an option. Yet the government has vowed to stick to its hard line on monetary policy. With economic growth of at least 3% projected this year--Brazil's gross domestic product declined slightly in 2003--the administration says it will not allow embryonic expansion, as in decades past, to morph into runaway inflation. "We will not sacrifice progress on structural reforms in order to obtain quick benefits," says Aldo Rebelo, the government's minister for political coordination. "Growth must follow a long-term vision."

But in an election year visions are easily clouded. Brazilians in October go to the polls to elect mayors and other municipal officials. And the ruling Partido dos Trabalhadores (PT), which won the federal helm largely on a promise of growth and job creation, is increasingly rattled by demands to deliver.

Despite modest growth projected for 2004, the economy is not creating jobs as quickly as new workers enter the job market. The unemployment level, which in January was at just under 12%, crept upward during the first half of the year, hovering at 12.2% as of early June, according to the Brazilian Institute of Geography and Statistics.

In urban areas like Sao Paulo, the country's biggest city, the figure is even higher. Polls show the PT likely to lose the city's mayorship, an office considered a bellwether for what later happens at the national level.

"The autumn will be a disaster for the ruling party," says Sergio Haberfeld, chairman of Dixie Toga, a Sao Paulo packaging company. "There was a lot of faith and understanding during the first year of the administration, but the government is losing that support because it hasn't been quick enough to make changes."

Priority. Haberfeld, like many business people, voted for Lula in the federal elections. After winning the support of a handful of key conservative politicians, Lula the candidate sealed the presidency by managing to convince the business community that the economy would be top priority. But business this year has turned on the administration because of its failure to make any significant progress in sparking consumer demand.

The PT itself is one of the government's main critics. The party, like the business community and many would-be consumers, is unhappy with Lula's monetary policy. But its chief complaint is that the government has done little to fulfill its campaign promise to launch a Brazilian-style New Deal, in which ambitious work projects would stimulate the economy. Even Lula's much-vaunted Zero Hunger program, a lofty effort to feed Brazil's 30 million poor, has taken a back seat because of cost cutting.

The government's hard line on spending last year helped it achieve a record primary budget surplus equal to 4.25% of the country's gross domestic product (GDP)--a feat it is on track to repeat this year. But in its zeal to cut costs the administration has kept more than just its social platforms on the back burner: It also has refrained from investing in infrastructure and industrial development projects.

That's no good for long-term growth, either. Such projects not only provide jobs, observers say, they help create the framework necessary to accommodate growth in the future. The sad state of the country's roads, for instance, creates bottlenecks--especially at seaports and major cities--that hinder the efficient flow of goods. And Brazil's electrical infrastructure needs modernizing, too, if it is to meet the projected demands of industry and consumers.

This year's modest growth is largely cyclical. Brazil, like other emerging markets, is simply rebounding from the downturn that hit economies worldwide after the burst of the global technology bubble. To truly get the recovery off the ground, economists say, growth must be directed back into the economy--and at levels far beyond that which the country is used to investing.

Merely to sustain predicted growth, the Brazilian economy in 2004 should receive investments equal to at least 22% of GDP, according to research by economists at HSBC Bank Brasil, a unit of the British banking giant. Last year's investment was 18.5% of GDP; this year the figure is expected to rise slightly.

And real growth in investment is unlikely until businesses and consumers are confident in a sustainable economic expansion and its ability to create new jobs. Just ask the country's construction industry, which hasn't seen any growth since 2000, when investment in Brazil last peaked.

According to Central Bank figures, construction activity reflects as much as 60% of total investment in the Brazilian economy. In 2002, builders saw the biggest reduction in revenues--a drop of 8.6%--of any sector tracked in the Central Bank's industry-by-industry breakdown of the economy. This year the industry expects to do better, but only moderately.

"Building is a mirror for all the investments made by every other sector of the economy," says Eduardo Zaidan, a vice president of the Civil Construction Industry Association of the state of Sao Paulo. "Until those sectors start investing we can't feel optimistic about the future."

The government, though, is asking Brazilians to be patient; growth, to be sure, won't happen overnight in an economy struggling to rebound from decades of erratic behavior. The structural reforms it has undertaken, the government argues, will help ensure the climate is stable enough to weather the external shocks it may receive yet dynamic enough to attract investments. Though the growth thus far is modest, says the government's Rebelo, "the framework of the economy is in much better shape to accommodate future expansion."

With criticism from so many directions, the government revels in the praise it has received from international lenders--the very quarters that once were the first to criticize Brazil's historically inconsistent economic policies. Even amid renewed tears in global markets about the country's economic future, the International Monetary Fund (IMF) has gone out of its way to laud the Lula administration's commitment to fiscal reform.

In a May visit to review the country's current $14 billion loan program with the fund, Philip Gerson, head of the IMF's Brazilian mission, praised Finance Minister Antonio Palocci's handling of the economy. "The government has implemented appropriate monetary and fiscal policies and pushed ahead with an agenda of key structural reforms," Gerson told reporters.

The banks that have downgraded the country's debt ratings "have their own opinion," Gerson said. "Our opinion is that things are going well in Brazil and Brazil is making important progress and is going to continue doing so."

Needs. So pleased is the IMF that it is beginning to be more flexible with the Brazilian government. It agreed, for instance, to consider changes suggested by the administration in the methodology the fund uses to calculate the budgets of debtor countries. The proposed changes, which would discount investments in infrastructure when tallying government spending, would allow the administration to invest in some of the development projects critics say are so badly needed.

But the IMF isn't the country's only creditor. Brazil continues to carry a heavy burden--with total domestic and foreign debt totaling $309.75 billion, nearly 58% of GDP. As U.S. securities become an attractive alternative to those of emerging markets, the Brazilian government will be increasingly limited in its ability to raise money by issuing more debt.

For an administration that bet the bank on a positive economic environment, it's just one more issue to contend with. October, to be sure, will say a lot about whether the stability the government touts is enough to keep the country's faith in Lula and his party.

"It wasn't just the working class that believed in this government," says Ilmar Silva, an economist at the United Workers' Central, Brazil's biggest labor union. "It was the business people, too. But now the markets are skeptical and the country's workers will be, too."