ANALYSIS-Euphoric Brazil CEOs risk ignoring election perils

* CEOs see turmoil-free Brazil presidential election

* Risks include new rules in sectors, weaker real

* Rousseff, Serra lack Lula negotiating skills

By Guillermo Parra-Bernal

SAO PAULO, March 10 (Reuters) - Chief executives are heading into Brazil's presidential election in October on cruise control, confident that the political noise and market swings of campaigns past won't be repeated. But skeptics say they may be in for a surprise.

Steel, consumer goods and financial services companies are hiring and investing at a record pace, convinced that the two front-runners will not bring about abrupt changes in economic policy. But their plans for more state intervention in the private sector, lower interest rates and a weaker currency could hamper hard-won economic stability nN05157556.

Massive oil finds, a quick economic rebound and President Luiz Inacio Lula da Silva's record popularity are feeding an unprecedented feeling of buoyancy among the chiefs of Brazil's biggest firms. The central bank expects growth of 5.8 percent this year, the fastest election-year expansion since 1994.

"We foresee a calm election," Roberto Setubal, chief executive of Itau Unibanco, Brazil's largest non-government bank, said at a recent seminar. "Economic policy in Brazil is well implemented and that shouldn't change in the coming years."

But economists including former central bank chief Arminio Fraga have warned that the business community, riding high on Brazil's economic success of recent years, is treating the election as a non-event despite potential risks.

There is almost full consensus that Chief of Staff Dilma Rousseff, the ruling party's candidate, and her main challenger, Sao Paulo state Governor Jose Serra, will not change the course of Lula's current macroeconomic policies.

But Rousseff is spearheading a plan to boost state control of the oil sector, and is believed to endorse higher mining royalties. Serra has openly opposed full central bank autonomy and has signaled his support for a weaker currency.

"It's surprising how businesses think that both Dilma and Serra are the continuation of the Lula model," said Luiz Carlos Mendonca de Barros, a former minister who now manages Sao Paulo-based investment firm Quest Investimentos.

No one is expecting the kind of dramatic market turmoil of the 2002 election year, when fears that Lula would enact radical socialist policies battered Brazil's currency.

"Candidates are conscious of the need to preserve market stability," said Edemir Pinto, CEO of BM&FBovespa, the world's third-largest stock exchange operator.

But they lack Lula's negotiating skills, Barros said. Lula, a former union leader who fought the military dictatorship, averted lengthy strikes, fended off pressure from industry groups and stifled radical actions from landless peasants and other social groups since taking office in January 2003.

Increased confrontation on the campaign trail, marked by intense attacks and populist rhetoric, could hurt markets.

Brazilian stocks traditionally lagged behind in election years, partly because the ballot marks the start of monetary tightening cycles. The benchmark Bovespa stock index .BVSP> fell an average 0.4 percent every election year since 1994, compared with a 21 percent surge in non-election years.

"No one can take any of these elements as 100 percent positive," said Nick Morse, who helps oversee about $23 billion in emerging market assets for Schroeders in London.

MUCH AT STAKE

After years of efforts to stabilize its economy, Brazil gained global status as an economic powerhouse under Lula.

The new president will have to endorse a pro-business agenda to lure investment, improve the economy's productive base and combat social inequality, said Lawrence Pih, head of Moinho Pacifico, Latin America's largest flour mill.

"Much is at stake in terms of long-term planning for the country now that the stabilization phase is over and Brazil is entering what appears to be a solid growth phase," JPMorgan Chase strategist Emy Shayo wrote in a recent report.

Fraga said in New York last month he is worried that investors have come to believe that Brazil is "perfect."

That sentiment sharply contrasts with turmoil in prior elections that led companies to halt investment as political noise and fiscal disarray ended in interest rate hikes and a weaker currency.

"Institutions are now stronger than before. Why would it all unravel again because we're in an election?," said Pih, a long-time Lula supporter.

The economy will survive the election unscathed, with growth anchored on an expansion in lending and wages, he said.

Steelmaker Gerdau CEO Andre Gerdau Johannpeter recently said that the election poses no risk for the steel sector.

Hypermarcas, the largest Brazilian multibrand consumer goods maker, has spent $300 million in acquisitions so far this year to tap into a buoyant consumer goods market.

(Additional reporting by Daniela Machado, Roberto Samora and Paula Laier in Sao Paulo, and Raymond Colitt in Brasilia; Editing by Todd Benson, Dave Zimmerman)