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Brazzil - Economy - May 2004

Real and Confidence in Brazil Down

The revelation by the New York Times, whether or not Lula's drinking
contributes to the general lack of direction his government
exudes, comes at a bad time for Brazil. The aura of confidence
in the country, has begun to dissipate. The real has weakened
to its lowest level against the US dollar since April 2003.

Richard Hayes


Picture Lula's government suffered its first major legislative set back earlier this month. The Senate failed to approve a Medida Provisória (Temporary Measure), a type of decree law, banishing bingo, slot machines and electronic games.

Lula had promulgated these measures during February in the wake of the accusations of bribe taking against his senior advisor, Chief of Staff, José Dirceu. Instead of allowing a congressional investigation to take place, Lula and his people decided to do away with this form of entertainment since the persons extorted by Waldomiro Diniz were involved in these then permitted, but always shady activities.

It did not take long for the bingo parlors, which employ 200,000 people around the country according to reports at the time they were closed down, to reopen. What is attracting attention at the moment is not whether or not this form of gambling, commonly used for money laundering, is good or bad for the country, but that Lula seems to have lost control of the Senate.

The coalition of several parties that have backed Lula's legislative measures in the past is disintegrating since the relationship between the executive branch and Congress has been taken over by Aldo Rebelo. In the past, this chore was performed by José Dirceu with his aide, the now disgraced Waldomiro Diniz, directly in charge.

Government reaction to Sunday's New York Times story by Larry Rohter has been quick and aggressive. Perhaps the article exaggerated in stating that Lula's drinking is a "national concern." Everyone knows that Lula drinks but it is not a big deal.

The mentioned list of his most-publicized gaffes was old hat and may be attributed to Lula's lack of knowledge and polish rather than to intoxication. Also Brizola, a has-been firebrand political hack and the brother-in-law of the now deceased former president Jango Goulart, who was ushered out of office to exile in Uruguay in 1964 by the military, is not the trustworthiest source of information.

Weakened Real

This revelation by the New York Times, whether or not Lula's drinking contributes to the general lack of direction his government exudes, comes at a bad time for Brazil. The aura of confidence in Brazil, evident in financial markets up until recently, has begun to dissipate.

The real has weakened to its lowest level against the US dollar since April 2003. The so called Brazil risk is up and Brazilian C-Bonds, the most heavily traded of Brazil's foreign obligations, has sunk to levels not seen since soon after Lula took office.

For the first time since I suggested selling C-bonds short at US$ 0.91 back in August of last year, followers would be in the money. At Monday's quote of US$ 0.85, carrying costs would have been covered leaving a nice profit. I doubt if we will see these bonds reach a premium over par again in the foreseeable future.

Two positive international events have been played up locally as major accomplishments for Lula and his government. The WTO ruled in Brazil's favor on the issue of US subsidies to its cotton farmers. It will be some time before any concrete benefits will accrue to Brazil's cotton growers and those of many impoverished African nations whose main cash crop is cotton. The US is expected to use all the delaying tactics it can muster especially in an election year.

Given the current philosophy against multinational organizations that prevails on the Potomac, the US might even pull out of the World Trade Organization if it feels its selfish interests are being threatened.

This decision in Geneva can be considered a victory for the developing nations as it may eventually influence how agricultural subsidies by the first world powers are treated. The Brazilian initiative originated before Lula took office, something which his PR people avoid mentioning.

The other encouraging piece of news is that the IMF is willing to study the possibility of not counting investments by government owned companies as expenses when calculating the primary surplus or deficit. This future possibility prompted a rash of announced capital investments by various ministries in Brasília.

No More IMF?

However the consequent euphoria was short lived as the studies are just being initiated with no date in sight as to their conclusion and how exactly calculations will be effected.

Since the authorities have perhaps prematurely stated that after the current IMF agreement expires at the end of 2004 they will no longer need help from this organization, the alteration of the treatment of capital investments could wind up being a moot question.

I seriously doubt, however, that Brazil will be able to attract the new money necessary to continue honoring its foreign obligations without the IMF in the picture.

The current turbulence in financial markets will hopefully be temporary and not a sign of an ensuing crisis. The government has enough problems to face without this.

Lula continues to give unwavering support to the policies of Finance Minister, Antonio Palocci, and consequently to Henrique Meirelles, central bank president, in spite of calls for their removal from members of his ruling coalition.

The trade figures continue to be favorable mainly due to exports of the agricultural sector, minerals and pulp. The portion of government debt denominated in dollars is less than it was. But debt as a percentage of GNP is still higher than it should be to provide comfort for creditors who notice.

Higher interest rates in the US as well as expensive crude oil may make Brazilian debt obligations more difficult to place. Right now the market is closed.

Banks' profits continue to increase as they earn high spreads on their loans to individuals and businesses but continue to carry government obligations as the major portion of their earning assets.

Since the government must rely on banks to buy its debt obligations, it cannot force the banks to lend to the private sector at rates that might encourage investment and job creation.

Strikes of government workers are intensifying causing hardship for many people particularly those seeking to be attended by INSS, the social security agency. Federal tax inspectors with their arms crossed are holding up exports.

Illegal invasions of productive rural private property and government buildings continue with no evident action being taken by Lula and his crowd to halt these actions.

None of this is new and these occurrences should not be blamed exclusively upon Lula and the PT government. Lula was courageous, after much delay, in raising the minimum wage by less than 10 percent to R$ 260 per month.

Since many pension benefits and salaries of state and municipal workers are based on this benchmark, a larger increase, such as that being contemplated by Congress, would have disastrous effects on the efforts to reduce government deficits.

Congress is not expected to produce much of a useful nature in the near-term future. Time is spent in speech giving in response to the New York Times article, which may have actually served to bring opposition forces to support Lula at least for a day. Initially, Congress was united in defending national dignity and sovereignty against foreign meddling in Brazil's internal matters.

Aside from the matter of the minimum wage that certain elements wish to increase over and above the R$ 260 decreed by Lula, Congress is divided over a possible constitutional amendment that would allow the reelection of the presidents of the Chamber of Deputies and Senate.

This controversy may result in splitting the PMDB, the largest party that nominally supports Lula. If so, Lula's base of legislative support will be further weakened.

At least for the time being, the bingo parlors are open in spite of the government's search for means to have them closed again. And so it goes in Lulaland.

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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