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 As
long as President Lula says and does the right things and statistics do
not deteriorate significantly, this current wave of confidence in Brazil
may persist. He has been very clever to gain the agreement of Brazil's
governors to back certain proposals to change the pension scheme for government
workers.
by:
Richard Hayes
Brazil, although it
opposes the war, has been careful not to invoke the ire of the United
States. It's not being given the chill treatment received by fellow Latin
American countries Mexico and Chile, who exercising freedom refused to
back the US invasion of Iraq in the UN Security Council.
US Secretary of Treasury,
John Snow, is due in Brazil at the end of April and will no doubt heap
praise on Lula's government for trying to do the right thing on the economic
front. Talks in Washington and New York between bankers, business leaders,
US government officials and Brazilian Minister of Finance, Antonio Palocci,
and Central Bank President, Henrique Meirelles went very well. Their soothing
performances have helped Brazil regain some confidence from lenders and
investors.
The real has strengthened
more than 15 percent versus the US dollar since mid March. It is at around
US$ 1 = 3.00 reais, its best showing since September of last year when
it still appeared that José Serra could be elected president. Brazil
"C" bonds were quoted at
US$ 0.86 to the dollar,
the highest since October of 1997. These bonds could have been purchased
at less than fifty cents on the dollar six months ago. The so called Brazil
risk as measured by JP Morgan's Emerging Markets Bond Index has fallen
to 868 points over US treasury bond yields, its lowest since last April.
The rise of the real
is due to supply and demand factors that are in turn the result of Brazil's
returning to the favor of bankers and investors. The placement of several
foreign issues of bonds, pro notes, CDs and commercial paper has caused
an inflow of hard currencies over and above the demand for them at this
time of year. Many of these obligations are of a short term nature and
will mature later this year.
But as long as Lula
says and does the right things and statistics do not deteriorate significantly,
this current wave of confidence may persist. He has been very clever to
gain the agreement of Brazil's 26 state (plus one federal district) governors
to back certain proposals to change the pension scheme for government
workers. This extremely unfair system that gives 80 percent of pension
benefits to 20 percent of retired Brazilian workers is the main cause
for the huge state and federal budget deficits.
Lula has promised
to present these alterations to Congress soon along with proposed legislation
for tax reform. It is futile to go into detail about these measures, as
they no doubt will be changed many times before being approved, if ever,
by the legislative branch of government that Lula doesn't control. His
ideas are a good start toward rationalizing the pension system such as
taxing benefits received by retired government workers over a certain
amount, capping the benefits to be received from the government coffers
and raising the minimum age for retirement.
Those negatively affected
by these changes are well organized and will no doubt cause headaches
for Lula and the society with strikes and protests that tie up traffic
and other demonstrations. The population as a whole is very badly informed
about the injustice of the present system. Lula has talked of a campaign
to educate the public and gain support for changing the rules that benefit
a few privileged citizens.
How Congress reacts
to these proposals is crucial to maintaining Brazil's recent gains. If
the process drags out with little of a tangible nature accomplished, confidence
in Lula's government may wane causing a reversal in the trends previously
mentioned. Should credit become scarcer toward the end of the year and
rollovers more difficult to obtain, problems can be expected.
Iraq Fallout
Brazil could gain
from the Iraqi reconstruction process. The US may wish to give the impression
that it is not in the business of enriching a few loyal Republican donors
such as Bechtel, Fluor and Halliburton. It may be recalled that prior
to the Gulf War, after Iraq's invasion of Kuwait, Iraq was Brazil's largest
supplier of crude oil. During the moratorium days when Brazil's credit
evaporated, Petrobras engaged in barter practices that helped open up
markets for Brazilian products and services in the oil producing nations.
Many of the burned out autos in Iraq shown on recent TV shows are remnants
of the 188,000 Brazilian-made VW Passats that were traded for crude between
1984 and 1988.
According to a recent
press report, Brazil also supplied US$ 135 million to $150 million worth
of frozen broilers to Iraq during the Iran-Iraq war until, pressure from
France and the US in 1989 caused the Iraqis to change suppliers. Many
Iraqi consumers would prefer to have the more tender Brazilian chickens.
Now that Luiz Fernando Furlan, former president of Sadia, Brazil's largest
producer of poultry products, is a Minister of Industry and Commerce,
it would not surprise me to see Iraq buying Brazilian frozen chickens
again once the occupation is over and commercial matters are put in Iraqi
hands.
Banco do Brasil had
a joint venture with Rafidian Bank owned by the Iraqi government in Rio
de Janeiro until the first Gulf War. Brazil is currently supplying Iraq
with canned meat, coffee and sugar as part of the oil for food program
administered by the UN. Brazil has a large and influential community of
businessmen of Syrian and Lebanese origins that are well prepared to take
advantage of commercial opportunities that will arise as Iraq returns
to normalcy. Mendes Jr., a now bankrupt Brazilian contractor, was building
the Baghdad subway when the hostilities began in 1991 and many of its
employees were stuck in Iraq. Brazilian contractors could receive some
work as sub contractors as the Americans shell out work to firms other
than the French, Germans and Russians.
Not much happened
during the last few weeks in Brazil. The Lower House passed some measure
that may open up a reform of the financial system that could lead to more
central bank autonomy. But an amendment to the constitution will be required
and I do not foresee that happening very soon. The invasion of private
property by the MST (Movimento dos Sem Terra or land less ones) continues
unabated with the government sitting on its hands. The merger between
VARIG and TAM that could somehow keep planes in the air and workers employed
still seems distant.
Now that Easter, Holy
Week and today's Tiradentes Day holiday are behind us, Congress may begin
to work at least until we approach the May 1 Labor Day holiday that coming
on a Thursday will cause another at least four day weekend for legislators.
So it goes.
Richard Edward
Hayes first came to Brazil in 1964 as an employee of Chase Manhattan
Bank. During the past thirty-eight years, 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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