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Brazzil - Economy - July 2004

The Lula Factor in Brazil's Good Tides

Who are the Brazilians to thank for this sudden surge in
economic activity? Cabinet members who swiftly dealt with
the China ban problem? Sure. Top officials at Petrobras? Could
be. Ultimately, the praise falls back to President Lula. His
conservative economic decisions have made Brazil more stable.

Giancarlo Iosue


Picture Latin America is a troubled region. One could span the various countries from top to bottom and find numerous problems. Colombia and Venezuela face political problems; the former is plagued with dead-end negotiations between its government and revolutionary warlords, while the latter faces a referendum vote in a matter of weeks to remove a seemingly despotic, Castro-like president who has made promises in the past, but has failed to keep his word.

Argentina is in the midst of the largest financial recovery that it has ever faced; and in addition to attaining fiscal stability, the country also faces its growing jobless percentages, and crime and kidnapping rates, especially in urban areas.

The financial problems that Argentina faced, and continues to face spilled over the northern border into Brazil. Though the common denominator among these countries is a link between political failings and economic woes, Brazil is showing some signs of strength.

Recently, Brazil's economic progress has been overshadowed by news media coverage of President Luiz Inácio Lula da Silva's struggle with alcoholism and the subsequent extradition threat of New York Times reporter Larry Rohter, the man who first sparked the subject of President da Silva's drinking habits.

Perhaps, more important to Brazilians has been the headline making coverage of the Copa America. After all, Edu, the mid-fielder for the Brazilian team said, "A bad performance can put a negative mark on the country forever, that's not what we want." 

However, in hindsight, these recent stories on Brazil ultimately affect the economy; and according to the quote by Edu, a negative mark on Brazil is not what economists want either.

Brazil's fiscal austerity can be traced back to even before the comments of Larry Rohter and Edu. In December of 2001, Brazil faced a challenge from its neighbor to the south, Argentina, not to follow in its footsteps.

Brazil's financial situation was unstable at best. The fact that Argentina defaulted on US$ 95 billion of sovereign debt made then Workers' Party (PT _ Partido dos Trabalhadores) presidential candidate Lula seem precarious as well. His party was the similar to that of Nestor Kirschner's in Argentina—progressive and left leaning, teetering above a weak economy.

The results have come and gone and after Lula won the election, to everyone's surprise, he defied his critics by turning his politically left visions into economically right ones; owning up to the many recommendations of fiscal severity made by the International Monetary Fund.

Capital markets, in addition to his critics, withdrew the skepticisms once held about the Brazilian leader. The IMF's reverberations were felt in the Bovespa (Bolsa de Valores de São Paulo—São Paulo's Stock Exchange) and the currency market as well.

The Brazilian stock market ended 2002 at over 11,200 points and ended 2003 at 1,000 points higher. The currency markets followed this trend with the Brazilian Real improving against the dollar by about 25 percent during the same yearly period. And as a result, the IMF rewarded Brazil by extending the country a $14 billion loan package at the end of 2003.

And though the Bovespa has waned in recent months, dropping back to pre-2004 levels, with gross domestic product shrinking by 0.2 percent, Brazil recorded significant gains in industrial output in May, underscoring the economic recovery of Latin America's largest country after its worst recession in a decade last year.

The Brazilian Census Bureau reported that output increased 7.8 percent in May from the same month a year ago. According to the Associated Press, 22 of 27 sectors that comprise Brazilian industrial sector improved due to rising exports of cars and telecommunications equipment and increasing demand for home appliances.

Further, numbers for June have shown even greater strength. Output will most likely increase and average daily exports rose 17.5 percent and average daily imports rose 14.4 percent from May.

Stronger numbers than what Brazil's economy has seen in months. What can be attributed to these figures?

From Beijing to Brasília

Aside from the overshadowing of the economy by the recent trends in the news, the trade sector of the Brazilian economy has received press lately. After losing an estimated US$ 1.3 billion on China's two-month soy bean trade embargo with Brazil, the two countries agreed on new standards to remove herbicide-laced seeds from cargoes of beans.

Soybeans accounted for about a third of Brazil's US$ 4.5 billion of exports to China last year. "As a matter of fact, we expect exports to rise to US$ 8 billion in June, which is an all-time record for us," said Luiz Fernando Furlan, Brazil's Trade Minister.

Lula has made boosting trade with China a focus for reviving the economy. Demand from the largest Asian country led Brazilian farmers to plant enough new soybean crops to cover an area the size of Israel.

Spurred by new global markets, soaring prices, and vast tracts of undeveloped land, Brazil is poised to surpass the United States as the largest soybean producer in the world, largely due to the explosive growth of farming in Mato Grosso and the continuing farming trends in Rio Grande do Sul.

Before the Chinese ban was lifted, Bloomberg L.P. reported that soybeans for July delivery rose 16.5 cents, or about 2 percent, to US$ 8.88 a bushel on the Chicago Board of Trade. The futures for July delivery fell 11 percent since April 29, when the China rejected the first shipments of Brazilian beans.

Another industry that reported growth in May and June was the fertilizer industry. "It's a solid environment for growth," said Francisco Gros, former chief executive of Petrobras and current CEO of Fertilizantes Fosfatados SA, Brazil's biggest producer of fertilizer.

"We are running the factories at full capacity. Orders are thriving and the prospect for future sales looks brighter," Gros told Bloomberg. Not surprising due to the new production and trade of soybeans.

The strong performance of soybean exports suggests that the temporary Chinese embargo on Brazilian soy exports did not have a meaningful impact. Could Lula's strategy for trading with China really be working?

The Prowess of Petrobras

Oil exports were particularly strong in the fourth week of the May and continued into June, when the trade balance posted a US$ 1,114 million surplus.

In total, Brazil posted about a 23 percent rise in oil exports for the month. Brazil has just been granted the exclusive title, via Petrobras, Brazil's state run oil company, as the world's leading global deepwater oil exploration player.

Reflecting this news, deepwater production has been steadily increasing from 1.7 percent, in 1987, and has reached more than 66 percent, in 2002, of the yearly average production according to Petrobras statistics.

Regions being used and/or considered for deepwater excavations are located in the Caribbean as well as the Gulf of Mexico. Petrobras has recently discovered gas and oil reserves in the Gulf of Mexico and through different partnerships throughout Latin America, most notably with Petroleos de Venezuela (PDVSA), plans to oversee gas and oil production in these areas through the new introduction of their deepwater advances.

A Petrobras press release told investors this past week that the deepwater discovery confirms the potential for significant gas developments in the Eastern Gulf of Mexico, where the Brazilian oil and energy company holds 100 percent participation on three more prospects of similar characteristics, the first of which the company intends to drill early next year.

Petrobras plans to reach about a 2 million barrel per day output production in 2006, with a close to 70 percent from deep and ultra-deepwaters.

Petrobras is also capitalizing in the situation in the Middle East by investing about US$ 35 million in initial oil exploration activities in Iran. The company has already begun to send officials and top executives to the region to explore the possibilities.

Last year, Petrobras won a license to explore oil in one of eight giant offshore blocks offered by the Middle Eastern nation in its first offshore licensing round. The block, known as Tulsan, covers an area of about 3,200 square miles in the Persian Gulf, roughly the size of the New England states.

But, closer to home, now that low-quality crude oil has recently been found off the shores of Cuba, Lula might strike liquid gold by investing some money in its island neighbor to the north, perhaps beating out offers from current competitors.

Though Petrobras has tried and failed to find oil off the cost of Cuba before, now that actual reports have been announced from Spanish oil and gas company Repsol YPF that there are possibilities for exploration, perhaps Castro would grant licensing contracts to its Latin American friend rather than Spain, a country who has voted many times against Cuba in European Union voting rounds.

Continuation. In Time?

What is Brazil to do now? Obviously follow their already positive trends. Current economic factors look good. Brazil's reserves in dollars are slowly but steadily increasing. The Brazilian Real is appreciating and trends in the import and export market are to remain strong.

So who are the Brazilians to thank for this sudden surge in economic activity? Cabinet members who swiftly dealt with the China ban problem? Sure. Top officials at Petrobras who are making better foreign investment and product diversification decisions by the day? Could be.

Ultimately, the praise falls back to Lula. As economists have said before, radical left-wing politics and his emergence during unsteady financial times were what made Lula tank Brazil in the first place.

His conservative economic decisions have made Brazil more stable. Interest and investment in Brazil can only become stronger as the largest economy in Latin America prepares to complete agreements for the upcoming formations of the Free Trade Area of the Americas before 2005.

Both agriculture and energy will have profound effects on the future of Brazil's economy for years to come.

Giancarlo Iosue is recent graduate of Fordham University's undergraduate International Political Economy program where he focused his studies in Latin America. He recently completed his Honors Thesis entitled "Embargo o Muerte," a reflection on the United States sanctions with Cuba. He can be reached at giancarlo.iosue@mail.com.

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