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Brazzil
Nation
May 2003

Brazilian Wonderland

Trade figures for Brazil look quite promising. Fact unheard, gasoline
prices fell and the real gained nearly 15 percent on the dollar
in the last month. On top of all a surplus of over US$16 billion is
predicted for this year thanks to a reversal of negative
sentiment and the positive performance of Lula.

Richard Hayes

For the first time that I can recall during my nearly forty years of residence in Brazil, the price of gasoline at the pump actually has been reduced. With the dollar considerably lower and world wide petroleum prices sliding now that the war in Iraq is nearly over, Petrobras had little choice but to modestly reduce what they charge to the distributors for gasoline and other derivatives. For some unknown reason, the cost of LP gas that many households depend upon for cooking remains unchanged.

Speaking of Petrobras, plans to build a new refinery were recently announced. Its location is still up in the air and may be decided by politics. José Eduardo Dutra, the president of Petrobras, has made it no secret that if it depended upon him, the new installation would be constructed in his home state of Sergipe. Several other northeastern states would like to have the refinery. Politics has already had some negative effects on Brazil's largest company.

During the presidential campaign, Lula stated that the purchased new offshore rigs should be awarded to Brazilian companies. This change of procedure has resulted in anticipated delays in the delivery of at least two platforms. A legal battle with Halliburton over two other rigs has slowed up their being put into use.

As a result of this confusion, the goal of self-sufficiency in petroleum products has been pushed back from 2006 to 2007. When and if this is achieved, a significant improvement in the trade balance will result. In the meantime, however, billions of dollars will be spent importing crude oil and other petroleum products.

Chávez and Castro

On the diplomatic front, Brazil continues to be chummy with Venezuela's president Hugo Chávez, who met in Recife with Lula for the third time since he became Brazil's President. The Venezuelan state owned oil company may participate in the new refinery. In return for a loan of US$ 1 billion from BNDES guaranteed by petroleum, which will be used to import Brazilian goods and services, Chávez has promised to support Brazil's aspirations for a permanent seat on the Security Council of the United Nations. France, Germany and Russia have also promised to back Brazil in this endeavor.

By failing to condemn Fidel Castro's recent clamp down on dissidents and summary executions of men trying to escape from Cuba's police state, Brazil has made itself look irresponsible to those who take notice of such things. Both the UN's Human Rights Committee and the Organization of American States voted to censor Cuba, but Brazil abstained using some flimsy juridical motives for their inaction.

The strengthening of the real, that gained nearly 15 percent on the dollar in the last month, has caused some observers to be concerned about the negative effects on exports that a cheaper dollar might have. My feeling is that exports will not suffer for a while at least, since the bulk of products Brazil exports are minerals or commodities or semi-manufactured goods such as steel, pulp and paper, and certain processed food products.

The producers of these products and the trading companies that export them, will receive less reais than when the rate was hovering around US$1=R$3.50 or upward from that. But at R$2.90 the dollar is still more expensive than it was a year ago and is ahead of inflation.

Surplus Ahead

The trade figures thus far in 2003 look quite promising. A surplus of over US$16 billion is predicted for this year. But should the Brazilian economy pick up fueling imports and the delayed effects of a cheaper dollar on exports begin to be felt later this year, this figure may not be reached. The mix of Brazilian exports has not changed in years, with the exception of Embraer's exporting of airplanes. Its order book is now anemic, which is no surprise given the condition of the airline business worldwide. The increase in Brazil's exports has come primarily from augmented agricultural production and higher prices for some of the food products that Brazil sells overseas.

The decline of the US$ in Brazilian exchange markets has been caused by a reversal of negative sentiment both at home and abroad and the unexpected positive performance of Lula and his economic team. Brazil placed a bond issue of US$1 billion the last week of April with UBS Warburg and Merrill Lynch leading the consortium. The rate paid, over 10 percent, and maturity of 2007 were more expensive and shorter than Brazil's last sovereign bond issue. Critics say the authorities should have waited until the Brazil risk factor was less. But I think they were smart to take advantage of this window that could close at any time if Congress excessively drags its feet in approving the pension and tax reform measures now before it.

Reforms

On April 30, Lula presented the government's proposal to a joint session of both Houses of Congress. He eloquently placed responsibility for starting to make some necessary changes clearly in the hands of the legislature. There continues to be vocal opposition from the radical ranks of Lula's PT (Partido dos Trabalhadores—Workers' Party). The other parties of Lula's coalition have not enthusiastically come out in favor of these timid yet revolutionary reforms. It is not clear yet how the "opposition" will behave but it is assumed that they will cooperate as many of these same reforms were proposed by Fernando Henrique Cardoso's government and stalled by opposition from the PT, who now is in power.

The government's project to inform the public of the inequity of the present pension system that favors some 3,000,000 retired and active government workers to the detriment of society as a whole is underway. It remains to be seen how responsible the politicians in Brasília will be. As Lula pointed out, these changes must be implemented this year, since 2004 will be taken up with municipal elections. And we are already in 2003's fifth month.

Lula took a swipe at the judicial branch of government recently that caused some indignation among judges. But others agree that the "black box" of the justice system should be exposed to the public. Judicial reform, that might eventually help curb crime and violence, is on Lula's list of things to do. Entrenched interests will be difficult to change, but at least Lula is trying to do something about Brazil's many maladies. Brazil Watch mentioned that Lula's task to try and improve Brazil is equivalent to that of a US president attempting to take on the military-industrial complex and the religious right at the same time. Lula's honest, direct approach is encouraging.

Astronomical interest rates, high unemployment and creeping inflation dampen consumer spending. The economy is not expected to grow enough this year to compensate for population increase. But the public, including many who voted against Lula, are behind him. This wave of semi-euphoria may lead to some better days ahead. All eyes will be on Brasília and progress in Congress' approving some changes that are necessary if Brazil is to break the cycle of increasing deficits and government debt, that coupled with high interest rates, stifles economic growth and social well being for Brazil's 173,000,000 souls.

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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