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Brazzil
Economy
May 2003

Gung Ho on Brazil

As long as President Lula says and does the right things and statistics do not deteriorate significantly, this current wave of confidence in Brazil may persist. He has been very clever to gain the agreement of Brazil's governors to back certain proposals to change the pension scheme for government workers.

Richard Hayes

Brazil, although it opposes the war, has been careful not to invoke the ire of the United States. It's not being given the chill treatment received by fellow Latin American countries Mexico and Chile, who exercising freedom refused to back the US invasion of Iraq in the UN Security Council.

US Secretary of Treasury, John Snow, is due in Brazil at the end of April and will no doubt heap praise on Lula's government for trying to do the right thing on the economic front. Talks in Washington and New York between bankers, business leaders, US government officials and Brazilian Minister of Finance, Antonio Palocci, and Central Bank President, Henrique Meirelles went very well. Their soothing performances have helped Brazil regain some confidence from lenders and investors.

The real has strengthened more than 15 percent versus the US dollar since mid March. It is at around US$ 1 = 3.00 reais, its best showing since September of last year when it still appeared that José Serra could be elected president. Brazil "C" bonds were quoted at

US$ 0.86 to the dollar, the highest since October of 1997. These bonds could have been purchased at less than fifty cents on the dollar six months ago. The so called Brazil risk as measured by JP Morgan's Emerging Markets Bond Index has fallen to 868 points over US treasury bond yields, its lowest since last April.

The rise of the real is due to supply and demand factors that are in turn the result of Brazil's returning to the favor of bankers and investors. The placement of several foreign issues of bonds, pro notes, CDs and commercial paper has caused an inflow of hard currencies over and above the demand for them at this time of year. Many of these obligations are of a short term nature and will mature later this year.

But as long as Lula says and does the right things and statistics do not deteriorate significantly, this current wave of confidence may persist. He has been very clever to gain the agreement of Brazil's 26 state (plus one federal district) governors to back certain proposals to change the pension scheme for government workers. This extremely unfair system that gives 80 percent of pension benefits to 20 percent of retired Brazilian workers is the main cause for the huge state and federal budget deficits.

Lula has promised to present these alterations to Congress soon along with proposed legislation for tax reform. It is futile to go into detail about these measures, as they no doubt will be changed many times before being approved, if ever, by the legislative branch of government that Lula doesn't control. His ideas are a good start toward rationalizing the pension system such as taxing benefits received by retired government workers over a certain amount, capping the benefits to be received from the government coffers and raising the minimum age for retirement.

Those negatively affected by these changes are well organized and will no doubt cause headaches for Lula and the society with strikes and protests that tie up traffic and other demonstrations. The population as a whole is very badly informed about the injustice of the present system. Lula has talked of a campaign to educate the public and gain support for changing the rules that benefit a few privileged citizens.

How Congress reacts to these proposals is crucial to maintaining Brazil's recent gains. If the process drags out with little of a tangible nature accomplished, confidence in Lula's government may wane causing a reversal in the trends previously mentioned. Should credit become scarcer toward the end of the year and rollovers more difficult to obtain, problems can be expected.

Iraq Fallout

Brazil could gain from the Iraqi reconstruction process. The US may wish to give the impression that it is not in the business of enriching a few loyal Republican donors such as Bechtel, Fluor and Halliburton. It may be recalled that prior to the Gulf War, after Iraq's invasion of Kuwait, Iraq was Brazil's largest supplier of crude oil. During the moratorium days when Brazil's credit evaporated, Petrobras engaged in barter practices that helped open up markets for Brazilian products and services in the oil producing nations. Many of the burned out autos in Iraq shown on recent TV shows are remnants of the 188,000 Brazilian-made VW Passats that were traded for crude between 1984 and 1988.

According to a recent press report, Brazil also supplied US$ 135 million to $150 million worth of frozen broilers to Iraq during the Iran-Iraq war until, pressure from France and the US in 1989 caused the Iraqis to change suppliers. Many Iraqi consumers would prefer to have the more tender Brazilian chickens. Now that Luiz Fernando Furlan, former president of Sadia, Brazil's largest producer of poultry products, is a Minister of Industry and Commerce, it would not surprise me to see Iraq buying Brazilian frozen chickens again once the occupation is over and commercial matters are put in Iraqi hands.

Banco do Brasil had a joint venture with Rafidian Bank owned by the Iraqi government in Rio de Janeiro until the first Gulf War. Brazil is currently supplying Iraq with canned meat, coffee and sugar as part of the oil for food program administered by the UN. Brazil has a large and influential community of businessmen of Syrian and Lebanese origins that are well prepared to take advantage of commercial opportunities that will arise as Iraq returns to normalcy. Mendes Jr., a now bankrupt Brazilian contractor, was building the Baghdad subway when the hostilities began in 1991 and many of its employees were stuck in Iraq. Brazilian contractors could receive some work as sub contractors as the Americans shell out work to firms other than the French, Germans and Russians.

Not much happened during the last few weeks in Brazil. The Lower House passed some measure that may open up a reform of the financial system that could lead to more central bank autonomy. But an amendment to the constitution will be required and I do not foresee that happening very soon. The invasion of private property by the MST (Movimento dos Sem Terra or land less ones) continues unabated with the government sitting on its hands. The merger between VARIG and TAM that could somehow keep planes in the air and workers employed still seems distant.

Now that Easter, Holy Week and today's Tiradentes Day holiday are behind us, Congress may begin to work at least until we approach the May 1 Labor Day holiday that coming on a Thursday will cause another at least four day weekend for legislators. So it goes.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. During the past thirty-eight years, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br