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Brazil: Revving Up the Propaganda Machine


Brazil: Revving Up the Propaganda Machine

A government sponsored public relations campaign for the Lula
administration is scheduled
for September as the government
attempts to transpose some of Lula’s personal appeal to itself.

Millions of taxpayers’ money will be spent to bolster the Workers’
Party image with next year’s
municipal elections in view.

by:

Richard Hayes

 

At the end of August, the BOVESPA index (São Paulo Stock Market) reached its highest level since 2001. The
BOVESPA has been among the top three highest rising stock exchanges in the world so far in 2003, measured in dollars. The
strengthening of the real since Lula took office has been a major factor in this performance. Average trading volume has
increased by more than 30 percent and foreign participation has returned.

The trade surplus, fueled by exports of the agricultural sector, may reach US$ 20 billion in 2003. Decreased imports
as a result of the recession also contribute to this positive result. Most maturing private sector overseas debt is being
rolled. Current account statistics are therefore satisfactory according to most analysts.

The real has remained steady in the R$ 2.90-R$ 3.05 to the dollar range. "C" bonds are holding their value at around US$ 0.90 to the dollar and the Brazil Risk as measured by JP
Morgan-Chase’s EMBI is stable. The primary budget surplus for the last seven months was reported by the Central Bank as 5.05 percent
of GNP, comfortably above the 4.25 percent target established by Brazil and the IMF.

One negative statistic divulged this week shows the public sector debt on July 31st at R$ 877 billion or 57 percent of GNP. This is up over R$ 20 billion from June 30. To put this in context,
R$ 20 billion is what may be saved over the next several years if the pension reform bill is finally approved. This increase
in what the government owes to its bondholders illustrates that interest on the public debt is an enormous drain on
government resources. Interest plus government payroll and retirement benefits leave little left over for discretionary spending for
health, education, security, resettlement of landless people and infrastructure projects.

These categories are where funds are needed if Brazil is to achieve sustainable growth that will lead to a better life
for its many poor people. So far what we have seen from Lula’s PT (Workers’ Party) government in this respect is mainly
talk and good intentions.

The PT continues to blame the previous government for current economic woes failing to acknowledge that last
year’s crisis was in no small part due to fears over what the PT would do if it won the election. Inflation was stoked by the
devaluation of the real that sunk as low as R$ 3.80 to the dollar leading up to the elections.

The economy has shown negative growth for two successive quarters signaling a recession by international
standards. Lula’s spokespersons insist that there is no recession but that we are merely in an adjustment period required to tame
inflation and regain the confidence of foreign investors. Thanks to the support Lula has given to Finance Minister Palocci, his
rigid fiscal and monetary policies seem to have accomplished these goals, at least for the time being. Lula, during a recent
flurry of press interviews and TV appearances, does not fail to congratulate himself for these accomplishments plus progress
on pension reform.

In spite of record unemployment and very few signs of an economic recovery, Lula’s personal popularity and
approval remains remarkably high. A recent survey demonstrated that 77 percent of those polled thought Lula is doing a good
job. This contrasts with opinions about the PT led government, who is performing satisfactorily according to merely 48
percent of those canvassed by Sensus, a pollster.

A government sponsored PR campaign is scheduled for September as the government attempts to transpose some of
Lula’s personal appeal to itself. Duda Mendonça, whose agency handled Lula’s presidential campaign, will lead this effort.
Millions of taxpayers’ money will be spent to bolster the PT’s image with next year’s municipal elections in view.

In Need of a Miracle

The watered down pension reform bill has passed the second vote in the Chamber of Deputies and will now move to
the Senate for two rounds. Once the Senate makes its alterations and approves them, the measure will return to the Lower
House. If all of this is accomplished in the next two or three months, it will be a miracle as Congress is also involved in tax
reform, that is going nowhere. The much-awaited new bankruptcy law also seems stalled.

The government’s tax reform proposal pleases no one. States and municipalities want a larger share of revenues. The
private sector fears that the tax burden that already is close to 40 percent of GNP will increase. Taxes in Brazil are among the
world’s third highest surpassing even Switzerland.

One originally heralded objective that seems to have been overlooked is simplification and modernization of the tax
system that might actually increase government revenues by reducing tax dodging. Were it not for the informal economy, this
country would be flat on its face.

The PFL (Partido da Frente Liberal—Liberal Front Party), the only opposition party that makes its voice heard, is
against the tax bill in its present form and has promised demonstrations. The PFL president, Senator Jorge Bornhausen from
Santa Catarina state, has labeled the PT the "Partido dos Tributos " or party of taxes. Since the PT needs votes from the
opposition to obtain the 2/3rds-majority required for constitutional changes, it is doubtful that this bill will be passed by September
30, in order to extend the tax on checks that will expire at the end of the year.

The government will probably introduce a separate bill to attempt to accomplish this measure rather than including it
in the overall tax reform. The PT government is counting on this revenue for various expenditures in the 2004 budget
presented to congress this past week. The budget looks realistic except that certain premises, such as inflation, exchange rate and
GNP growth besides the renewal of this 0.38 percent tax on all bank account movement, may not happen as the government hopes.

The reduction of the SELIC or basic interest rate to 22 percent has caused some animation to the business sector.
Normally the last quarter of the year is good for retail sales and consequently manufacturing. Makers of cardboard used in
packaging have reported a slight upturn in orders. So, perhaps better days are ahead for Brazil. But were I a trader, I would short
"C" bonds at $0.91. Should the economy remain sluggish and social unrest, crippling strikes and rural conflicts intensify, it
would not take long for analysts, lenders and the credit rating agencies to reverse field. With a bunching of overseas
obligations coming up in 2004, rollovers may not be as easy as at present with a new IMF agreement still very much up in the air.

São Paulo, August 31, 2003

 

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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