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Brazzil - Economy - June 2003

Lula Shining Abroad

The Brazilian Gross National Product growth was negative in
the first three months of 2003 and shows few signs of reviving
very soon. Contrasting with the gloomy reality of the real
economy, Brazil's image and that of Lula seem to continue to glisten
overseas. Domestically the honeymoon is over, however.

Richard Hayes

Prior to taking off for Geneva aboard a special Boeing BBJ, which is a 737 configured as an executive jet on loan to Brazil, Lula managed to take a few swipes at banks for charging their customers such high interest rates. He cited numbers and stated that the spreads between the SELIC rate of 26.5 percent and those levied by banks were unreasonable. Expensive and scarce credit at only 27 percent of GNP, compared to over 100 percent in some of the G-8 countries, is a contributing factor to the decline in economic activity. GNP growth was negative in the first three months of 2003 and shows few signs of reviving very soon.

Contrasting with the gloomy reality of the real economy, Brazil's image and that of Lula seem to continue to glisten overseas. It would not be surprising to see another sovereign risk bond issue quite soon in order to take advantage of this situation while it lasts. Lula, who will commute by boat across Le Léman (Lake Geneva) from Lausanne to Evian, was invited to participate as a guest at the G-8 meetings this weekend. Protesters barred from Evian have taken to the streets of normally placid Geneva and Lausanne to vent their opposition to globalization and a host of other grievances. Lula is expected to be the star among the leaders of some twenty third-world nations invited to the summit by Jacques Chirac against the wishes of the US.

Aside from seeing other leaders from the developing world at the Beau-Rivage Palace in Lausanne, where they are all billeted, Lula is expected to meet with Messieurs Putin and Chirac. He may even shake hands with the world's most powerful man, who is hop scotching around between Cracow, Saint Petersburg and Evian before cutting the G-8 meetings short to be off to attend to more pressing matters in Cairo and Amman. Lula will be expounding his Zero Hunger program and the need for aid to the poor nations. I doubt if much of an impression will be made on the leaders of the seven most important industrialized nations plus Russia as all them have serious economic problems at home.

Boeing is trying to sell its $50,000,000 jet to the Brazilian Air Force (FAB) to replace the old 707 that has served as a presidential plane for over 40 years and that is called Sucatão (The Big Wreck) by the national media. Airbus will also lay on a plane for one of Lula's next trips. Embraer is working on a plane that will have sufficient range to take Lula to Europe and the US as well as other destinations within South America and Brazil. I expect that the Brazilian made aircraft will win out over foreign competition even if initially it might have to land in Monrovia, Dakar or Santo Domingo as did commercial flights before the long range jets came into use.

Lula flew to Cusco to attend the Rio Group meeting ten days ago and then on to Buenos Aires to be present at the swearing in of Nestor Kirchner as Argentina's latest president. Lula is scheduled to meet with George W. Bush June 20 in the oval office and has been invited by Tony Blair to make a state visit to Britain later on. Lula is due in Lisbon in July. He also expects to visit China and Japan this year. So whichever plane Lula flies will see plenty of use.

His colleagues from other South American countries have proclaimed Lula the leader of South America. Lula, with his unique CV, and the general degree of economic and institutional turbulence on the South American continent, with the exception of Chile and possibly Uruguay, is a natural for this role. He has their backing for a permanent seat in the UN Security Council. Lula has promised financing to Argentina, Bolivia and Ecuador. The source of these funds has yet to be determined as only seven or eight months ago Brazil was seen as a strong moratorium candidate by market makers and has only recently been able to place its own paper abroad.

On the political front, little of a constructive nature has been accomplished. The PMDB (Partido do Movimento Democrático Brasileiro—Party of the Brazilian Democratic Movement) has agreed to support the government in exchange for jobs. They expect to occupy a ministry, an ambassadorship to a cushy European post and positions in various states where the federal government has the power of the pen. Enlisting the PMDB in theory gives Lula and the ruling coalition sufficient votes to pass constitutional amendments that are necessary to implement the much-needed tax and pension reforms. This has yet to be tested, however, and not all PMDB members are pleased with this blatant move to gain participation at the federal level.

The Home Front

Domestically the honeymoon is over. With municipal elections coming up next year, the politicians are beginning to jockey for position. So far the center to center right "opposition," that consists of two of the three former major members of the coalition that supported former president Fernando Henrique Cardoso, have acted quite responsibly. They would like to have these reforms, which were proposed by them and battered down by Lula and his followers in the past, resolved. Then they could zero in on the organizational, managerial and administrative inadequacies of Lula and his team, which are now few. Many of the leftists who supported Lula in the past have now turned against him because of his economic policies that are necessary to regain confidence abroad.

The controversies over interest rates and combating inflation have reached a higher pitch. It will be very interesting to see what happens when Copom meets later this month. Finance Minister Antonio Palocci and Central Bank chief Henrique Meirelles have shown their determination to not yield to political pressure. This pleases Brazil's creditors, the IMF, World Bank etc., but is perceived locally as strangling the morbid economy. They may now find a technical reason to lower interest rates in order to not appear to be influenced by political pressure thus pleasing all parties.

The Congress has done little to demonstrate responsibility. The Senate voted to file two investigations in the last month. One had to do with the accusations that Senator Antonio Carlos Magalhães had ordered the illegal tapping of phone lines in Bahia. This is almost folkloric as this man has as many lives as a cat. But this past week, with acquiescence of the supposedly clean PT, a motion to instigate a congressional investigation into money laundering amounting to as much as $30 billion by the Banco do Estado do Paraná through its Foz do Iguaçu and Paraguayan branches and a subsidiary, was removed from the agenda. The excuse was that since politicians may have been involved, disclosure of wrong doings by these statesmen might hamper the passage of the reforms that the government has proposed.

Finally, as expected, Congress will be convened for a special session during the month of July. According to the constitution, Congress has a paid recess during July. This emergency measure will cost taxpayers some R$ 15 million (US$ 5 million), according to a report in the daily O Estado de S. Paulo. Each senator and deputy will earn an extra R$ 25,440 (around 8 thousand dollars) in addition to their normal pay of over R$ 12,000 (4 thousand dollars) for this month of "work" due to the need to vote these reforms as quickly as possible. Employees will be paid overtime. This is a common occurrence since Brazilian lawmakers for the most part fiddle around while in Brasília, normally only from Tuesday until Thursday evening, and then require a special session to do what they should have done in the first place.


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


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