It’s Still Honeymoon

It's Still Honeymoon

It may be a while before the current feeling of good
will and grace period toward the new
government dissipates.
The local media is beginning to point out some of the
deficiencies and past history
of participants in Lula’s
government and their confused actions thus far.


Richard Hayes

The real remains steady as several loans to Brazilian banks and companies are supplying dollars to the market.
Macro economic factors such as the ratio of public debt to GNP have improved. The trade balance, helped by exports of
agricultural products, is positive. C- Bonds are now quoted at over US$ 0.70 to the dollar, a huge advance since the pre election
jitters. Inflation is abating. There has been talk of voluntarily increasing the target of the primary surplus before meeting with
the IMF again in February. Interest rates are expected to remain unchanged when COPOM (Comitê de Política Monetária—
Monetary Policy Committee) meets next week. Attempts by state governors to obtain help from Brasília to solve their financial
problems have met with a strong "no" from Palocci.

So far silver-tongued central bank president, Henrique Meirelles and Antônio Palocci, the doctor turned mayor and
now finance minister, are saying the right things to inspire confidence on the part of lenders and investors. Even George
Soros has made some positive statements this week. Soon, however, some concrete signs of the government’s ability to do
what it says it intends to do in the economic/financial area may be expected. In my opinion, the following proposed reforms
will be difficult if not impossible to complete soon:

1.) Central bank independence

2.) A through reform of the social security
(previdência) system

3.) Modernization of labor laws

4.) A new bankruptcy law

5.) Tax reform

I do not foresee congress authorizing central bank independence quickly. First of all, not all legislators understand
what central banks are supposed to do. This measure, which is not universally approved by even the government’s own
Workers’ Party, will be tied into a general banking reform, which before reaching the floor could take many months to be debated
by various committees once congress reconvenes sometime after Carnaval, March
1st to 4, this year.

Meirelles is under suspicion by some since he formerly worked for Fleet/Boston and is drawing a healthy pension of
US$ 750,000 per year, according to recent press reports. Although it is normal for someone who worked many years for an
American bank of this size and reached the higher echelons of management to have this benefit coming to them, it may complicate
his relationship with congress.

Although the Public Ethics Commission, an organ subordinated to the President, has found nothing wrong with
Meirelles healthy pension, certain elements could say that he is looking out for the interests of his former employer and the
international banking system in general rather than being concerned about resolving Brazil’s social problems. Although the idea of
an independent central bank does not in theory depend upon the current incumbent, Meirelles’ pension plus his well
known political aspirations may hinder his becoming the first president of an independent Brazilian central bank, in my opinion.
His photo has appeared in five of the last six editions, including a front page, of
O Estado de S. Paulo, one of Brazil’s most
respected newspapers. This demonstrates that his PR people are functioning. Normally a discreet central bank president
behaves differently.

Tough Changes

Reforming the social security system that unfairly favors retired government workers over those of the private sector
is bound to be polemic. Former President Fernando Henrique Cardoso tried for years to change things without success
mainly because of opposition from the PT (Workers’ Party) that now in government says it will reform the system. Cutting the
benefits of the judicial and military has already met strong resistance.

The plan recently proposed by welfare minister Ricardo Berzoni would be a big improvement to reducing the annual
deficit of R$ 54 billion caused by benefits paid to inactive government workers. However, in my estimation, any attempt of
correction of these distortions, which are necessary if the country expects to attain firm financial footing, will be time consuming
and will cause disillusionment on the part of creditors and investors who follow things here.

Attempts to change Brazil’s labor laws, which go back to the days of dictator Getúlio Vargas (1883-1954) and make
hiring people formally very expensive, may get nowhere soon. This, along with improving the laws concerning bankruptcy,
probably does not attract much attention abroad. But they are important if Brazil is to become more competitive internationally
with manufactured goods. Previous attempts to simplify Brazil’s taxes have never advanced. Perhaps with firm leadership
from the executive branch progress can be made.

January 15, President Luis Inácio Lula da Silva made his first trip out of Brazil since being sworn in. He went to Quito
for the inauguration of Ecuador’s recently elected president, Lúcio Gutierrez a nationalistic leftward leaning military man. In
addition to offering photo opportunities of Lula conversing with Fidel Castro and Hugo Chavez, their second encounter in two
weeks, the meeting in Quito gave Lula a chance to launch the "Friends of Venezuela" initiative, which had been suggested then
later criticized and now tepidly endorsed by the US.

The strike at Petroleos de Venezuela (PDVSA), now in its seventh week, has among other more disruptive effects
(for Venezuela) caused a reduction in the US oil reserves to their lowest level in several years. Naturally the US would like a
swift, clean solution to Venezuela’s internal problems that would result in the normal flow of oil. It is not clear how the
"Friends of Venezuela" committee will assist OAS Head, César Gaviria, negotiate a peaceful, democratic, political solution to the
impasse caused by Chavez reluctance to step down or anticipate elections or a plebiscite scheduled for August.

Lula’s Busy Schedule

This matter that should be resolved internally by Venezuelans may yet be settled without more bloodshed. Chavez
has met with leaders of COPEI, the major opposition party that has ruled the country alternatively with AD (Acción
Democratica) since PJ (Marcos Perez Jimenez,) a right wing military dictator who favored US oil interests, was ousted in 1958. I
suspect that Brazil’s role in all this will be minimal as Lula’s has clearly expressed his preference for supporting Hugo Chavez,
who was legally elected president and who still enjoys a great deal of support from the poor.

Lula’s traveling schedule in January will include his presence at an anti globalization rally in Porto Alegre (state of
Rio Grande do Sul) followed by his attending a meeting January
23rd of the world’s business, banking and political leaders in
Davos, the Swiss mountain holiday and conference center. One wonders when he will find time to forge the political alliances
needed to pass the legislation necessary to implement some of the measures eagerly expected by the financial community.
Relations with the PMDB (Partido do Movimento Democrático Brasileiro—Party of the Brazilian Democratic Movement) have
been soured by Lula’s preference for ex-president José Sarney to preside over the senate whereas the main stream PMDB
members would prefer Renan Calheiros, an old pal of former president Fernando Collor, who was impeached.

It may be a while before the current feeling of good will and grace period toward the new government dissipates. The
local media is beginning to point out some of the deficiencies and past history of participants in Lula’s government and their
confused actions thus far.

We all wish Lula and the PT good luck as they struggle to improve the lot of Brazilians in general. They need
legislative support, which may be difficult to obtain without falling into the same patterns that other political parties use.

Without support from congress, to which he once referred as 500
"picaretas," Lula may to tempted to go directly to
the people, which would not be good for institutional stability. For those not familiar with Brazilian slang, a
picareta can be defined in English as a shyster, chiseler or cheat. It is not a complimentary term but is not far off in describing certain members of
the legislative branch of government whose main concern seems to be lining their own pockets and those of their family and
friends rather than working on matters of interest to the general population.

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 

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