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Brazil 2009 – The Year of Living Dangerously

Round table. Fitzpatrick is the one with the mikeThe year 2009 will be the penultimate of President Luiz Inácio Lula da Silva’s term in office and looks like being the toughest of his two mandates. The favorable international situation we saw not so long ago, which boosted demand for Brazilian products like iron ore, soybeans, sugar, coffee and beef, has gone. 

The “decoupling” theory that developing economies would be unaffected by the problems of the advanced countries, thanks to China’s ongoing growth, has lost credibility. The decline in oil prices has ended the euphoria over the discovery of huge offshore petroleum reserves.

Even the enthusiasm over the prospects for ethanol as a renewable fuel to replace fossil fuels has fizzled out. The international crisis has still not hit Brazil with full force and Lula has acted to mitigate its impact.

However, how he reacts when things get worse will be critical and Brazilians can only hope that any frustration he feels that his achievements will be thwarted by what he sees as an external contagion will not lead to hasty decisions.

So far, Lula has remained restrained and his approach has won widespread support. A recent survey by the CNT/Sensus organization showed that Lula’s personal popularity rating was an astounding 80.3% – up from 77.7% in the previous survey three months earlier.

The poll also shows that people are still fairly optimistic, with 37.9% feeling Brazil would overcome the crisis and 41.9% believing it would emerge stronger afterwards. At the same time, a hefty 40% felt Brazil was not prepared for the full impact of the crisis.

Lula has reversed his earlier view that the crisis was restricted to the United States and would only have a “ripple” effect on Brazil. He has responded by freeing up credit to try and ensure that exporters and companies have enough funds for working capital and future investments.

His main fear is that unemployment will rise and hit his bedrock support among the working class and poorer section of society. He also wants to encourage consumption and has backed up actions by the Central Bank, the BNDES development bank, and state-owned banks by personal appeals to private sector banks to make more credit available.

He has also called on companies not to fire workers and even interrogated the CEO of the mining group, Vale, in which the government owns a substantial stake, on his plans to dismiss staff. In turn, Lula has had to listen to requests by companies and employers’ associations to ease Brazil’s restrictive labor laws to allow temporary lay-offs although there has been no sign that he will heed them.

Lula has also made it clear that he expects the Central Bank to cut interest rates at its next meeting in January 2009. While Central Banks all over the world have been slashing interest rates – to between zero and 0.25% in the United States, for example – Brazil’s monetary policy committee left the rate unchanged at a world high of 13.75% at its last meeting. This was the first time Lula has made known his desire for lower interest rates so publicly and specifically that one wonders just how much “independence” the Central Bank now has.

Whether this was just an off-the-cuff remark and his calls to the banks and industry were just general appeals or signs that Lula intends interfering more is yet to be seen. However, they reflect my worst fear that Lula’s frustration as he sees growing threats to his triumphs – rising GDP, higher levels of employment and income, greater social equality – will lead him to lash out and forget the lessons he has learned over the last six years.

Deep down, Lula does not believe in the market economy and believes the state should have the final say. For example, his response to the recent merger of Banco Itaú and Unibanco which will topple the state-controlled Banco do Brasil from its leading position was to call on BB to buy up other banks and regain its position.

He must be taking heart from the actions of governments in capitalist countries like the US and UK which are buying up banking assets and providing aid packages to industry. If anyone criticizes his approach, all Lula needs to do is to point to George Bush’s announcement on December 19 that the US will make US$ 17.4 billion available to help the troubled American carmakers.

The incoming President, Barack Obama, has also made it clear that he will be pouring billions of dollars of public funds into packages to improve infrastructure projects, something which sounds similar to Lula’s Accelerated Growth Package (known as the PAC).

With the capitalist world floundering and no clear policies other than spending taxpayers’ money in sight anywhere, Lula will feel justified in following his own instincts.

If these lead to higher public debt and rising inflation, then so be it. This is a cost Lula, the ideologue, might be prepared to pay but whether the Brazilian electorate will go along with it is another matter, particularly if it leads to a return to the high inflation which plagued the country for 20 years.

The fall in commodity prices, including oil, may have dented Brazil’s trade balance and hit its commodity exporters but it has reduced inflationary expectations for the moment so this danger looks remote.

However, as 2009 proceeds we will see the parties choose their candidates for the 2010 presidential and state governorship elections. Lula cannot stand again and his preferred candidate, Dilma Rousseff, who is still virtually unknown at national level will face an uphill battle in establishing her credentials against a world recession and an economic downturn in Brazil.

If Lula gives in and lets his heart rule his head then he will probably pave the way into office for his political rival, José Serra of the PMDB, the governor of São Paulo state.                            

To offset this rather alarming prospect, let me mention a round table discussion I took part in recently, organized by the British Chamber of Commerce in São Paulo. The following correspondents also took part: Todd Benson (Reuters), John Rumsey (freelance), Jonathan Wheatley (Financial Times), Ken Rapoza (Wall Street Journal) and Rogério Simões of the BBC in London.

Most were cautiously optimistic about Brazil’s prospects for the coming year although Benson was not as upbeat as the rest of us. Simões’s comments as an “insider”, i.e. the only Brazilian commentator, were particularly valuable.

He put the current crisis into perspective by comparing it with the situation at the beginning of the 90s when the finance minister – whose knowledge of running an economy came straight from textbooks – “solved” the problem of inflation by freezing every single person’s bank account.    
 
In conclusion, I would like to wish all Brazzil readers a happy Christmas and prosperous New Year, particularly those who have taken the trouble to write to me or comment on my articles whether they agreed with me or not. 

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at jf@celt.com.br.

© John Fitzpatrick 2008

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