Brazil: Waiting for Lula... to Get Out

Lula's administration is still mired in inefficiency and inability to
deliver any programs to help the lot of the people or to stimulate
the economy. Meanwhile, Brazilian banks' profits continue to set
record levels. This is one sector of the economy that seems to
prosper regardless of what is going on politically or economically.

Richard Hayes

Brazilian President Luiz Inácio Lula da Silva's popularity and that of his government have sunk to the lowest level since he took office nearly eighteen months ago. Right now, the chances of his being reelected in 2006 look fairly slim.

The general attitude of businessmen and the public is that there is no choice but to ride out the remainder of Lula's term and hope that previously relatively well functioning institutions do not further disintegrate due to the appointment of PT officials.

He is doing the best job he can given his extremely limited educational experience as well as a lack of administrative ability. His overtly leftward leaning advisors are of little help.

It appears that the new minimum wage will be 260 reais (US$ 84) a month, a modest increase over the 240 reais (US$ 77) that was the rule during the past year. The Chamber of Deputies voted in favor of Lula's decree law for the second time overriding the Senate's bill proposing 275 reais (US$ 89).

This makes it unnecessary for Lula to veto the Senate's ruling, which would have been politically unpleasant. Lula and his staff of advisors have handled this whole issue clumsily. Increases in the minimum wage augment what the government pays out in pensions further unbalancing this source of budget deficits.

The China Jaunt

The trip to China of Lula and his entourage has resulted in little of a concrete beneficial nature for Brazil. Lula's grand idea of forming an alliance among the big three of the developing world, Brazil, China and India, has fallen on deaf but polite ears.

His trip coincided with a May 5th embargo on Brazilian soybeans that has caused substantial losses for many trading companies and exporters of these products.

The contracts were signed when prices were higher and China feared a shortage. When the price of the soybean complex dropped, China found technical reasons to refuse to accept the shipments.

As one major Brazilian producer and exporter pointed out, if prices had remained the same or increased, China would not have worried about a few seeds contaminated by something or other appearing in the holds of ships.

After Brazil announced more strict inspections of exported soybeans, China has lifted the embargo for shipments after June 11. Brazil exported over a billion and a half dollars worth of soybeans to China last year. To permanently lose this customer, would not be convenient.

Brazil can learn a thing or two from the world's oldest trader, which is more concerned about selling to Wal-Mart than becoming involved politically with a struggling Latin American third world nation.

There were promises of Chinese investment in Brazilian infrastructure projects but nothing has materialized in this respect nor is it apt to until Brazil establishes rules and procedures for attracting this much needed foreign investment.

The US Tour

Lula's time in New York late June was similarly unproductive from a practical point of view. Potential investors politely applauded Lula's remarks at the Waldorf Astoria and await a clearer definition of regulatory procedures.

Foreign Direct Investment has fallen off significantly and several companies are pulling out of Brazil or would if they could find buyers. Duke Power, who has invested in electricity, is seeking means to exit, it is said.

Agip, controlled by the Italian ENI Group, has sold its bottled gas and filling station operations to a subsidiary of Petrobras. The Krupp-Thysen group has spun off a division to Brazilian buyers recently.

Minister of Mines and Energy, Dilma Rousseff, has caused the resignation of José Tavares as secretary of economic accompaniment of the Ministry of Finance. He is a non-political technically competent man who has worked in Washington at the OAS.

His departure is only one of several non-PT members who have quit or been pushed aside because of ideological differences. The regulatory agencies that were established to control electricity, phones, ports, and other essential services, some of which were privatized during the last government, have been heavily hit. This has caused confusion and impeded fresh investment in these areas as uncertainty over rules and regulations reigns.

On the Rebound

The economy seems to have bottomed out. The unemployment rate has dropped slightly and auto sales have picked up. It is premature to say that all is well and that a recovery is under way.

But this news has heartened the government that is still mired in inefficiency and inability to deliver any programs to help the lot of the people or to stimulate the economy. Palocci's position has been strengthened as it appears that a sound basis for future sustainable growth is being established.

During the month of June, financial markets have been more tranquil after May's nearly 10 percent devaluation of the real. A sovereign risk bond issue was over subscribed. The interest rates that Brazil pays overseas investors is much higher than those earned on less risky assets.

Local maturing government debt has been successfully rolled over with no significant worsening in the profile of its obligations. Banks are loaded with cash and the government is by far their largest taker of funds.

Banks' profits continue to set record levels, the one sector of the economy that seems to prosper regardless of what is going on politically or with the economy.

Congress will probably be convened for a special session during July, which is supposed to be one of their three vacation months each year. These additional salaries will cost taxpayers up to 50 million reais (US$ 16 million), enough to build several schools or hospitals. The excuse will be that with municipal elections coming up in October, legislators will need to spend more time in their home districts.

A measure introduced by one responsible member of Congress that would merely postpone the recess until August thereby eliminating the need for a "special session," has been tabled.

Also suggestions that the holiday period for these privileged few be reduced to 45 days or even to 30 days, making them equal to other Brazilian salaried workers, have been ignored.

The President's party, the PT (Partido dos Trabalhadores—Workers' Party), had championed such moves, in the past, but now that they are in power, they are mute on the subject. All this does little to embellish the image of the legislative branch of government.

Farewell to Brizola

Many were saddened last week with the death of 82-year-old Leonel de Moura Brizola. He is the last of the leftist nationalist caudillos, a man who stuck to his convictions, right or wrong, through the years.

He had been governor of Rio Grande do Sul before he was ushered out of the country in the wake of the military takeover in March of 1964.

Returning when he was given amnesty later on, Brizola was twice elected governor of the State of Rio de Janeiro where he then resided. Brizola never achieved his goal of becoming Brazil's president.

He ran for vice president on a loosing ticket with Lula, whom he once called a "bearded toad." After wakes in Rio de Janeiro and Porto Alegre, he was put to rest in São Borja, on the Argentine border, by the same grave digger that buried his brother-in-law, ex President João "Jango" Goulart who was ousted by the military during the peaceful March 31 revolution of 1964.

As I write this, I am reminded that today we are a month from the 26 of July, the anniversary of the 1953 attack on the Moncada barracks in Santiago de Cuba.

This historic event started the revolution that overthrew dictator Fulgencio Baptista and eventually brought Fidel Castro, the hemisphere's most durable head of state, to power on January 1, 1959.

His achievements or the lack thereof during all these years should be a lesson to those who revere and emulate Castro, including some of Lula's closest advisors.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, 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.