Now, Brazil Has to Create Jobs

     Now, Brazil Has to Create Jobs

    The so-called Brazil
    risk factor is at its lowest since 1998 and C
    bonds are selling at nearly face value. The real is holding steady.
    Few people anticipated this rosy scenario in the months leading up
    to the presidential election in October of 2002. I was not one of them
    and I continue to be somewhat leery of Lula and his cohorts.
    by: Richard


    Surpassing all estimates,
    Brazil’s trade surplus for 2003 has nearly reached a record US$ 25 billion.
    This feat has been accomplished mainly by increased exports of primary and
    semi manufactured goods. Farm products such as the soybean complex, sugar,
    orange juice, coffee, tobacco, corn, and broilers were instrumental in achieving
    this result. Iron ore, steel and pulp exports also helped. The auto companies
    exported as much as possible in order to occupy some of their excess capacity.
    Exports totaled over US$ 73 billion, another record.

    Imports were up only 2
    percent over 2002 due to the sluggish economy. Experts predict that beef exports
    will expand soon due to the mad cow problem in North America and the reaction
    to it from Japan, Korea and elsewhere. Higher prices for corn and soy products
    can be expected as consumers switch to pork and chicken if the scare persists.
    Pigs and chickens eat more of these feed elements than do cattle. But if the
    local economy picks up as nearly everyone anticipates, Brazil’s trade surplus
    may fall during 2004.

    Many observers feel that
    the shortfall in the positive contribution to Brazil’s current account as
    a result of the favorable trade surplus will be compensated by an increase
    in direct foreign investment. However, this may be wishful thinking. Lula’s
    PT government has not shown an overly hospitable attitude to foreign capital,
    emboldening state and local authorities to act in a similar fashion.

    A recent example of this
    behavior is the so far obscure case involving Cargill’s US$ 12 million investment
    in a grain elevator and port facility in Santarém, state of Pará,
    where the Tapajós meets the Amazon. According to a recent article in
    O Estado de S. Paulo, 37 NGOs in the Amazon along with federal prosecutors
    have managed to cause a headache for this company.

    Since 1964, Cargill has
    consistently reinvested profits in Brazil, creating jobs while contributing
    significantly to Brazil’s exports and the nourishment of the population. It
    has been alleged that by offering a ready market for soy producers, Cargill
    has contributed to deforestation and the increase in the cost of land in the

    As an out, Cargill has
    been offered the opportunity to build an archeological museum in Santarém
    and a building to house the future Federal University of Western Paré.
    Is this form of blackmail any way to treat an investor in one of the least
    developed areas of the country?

    Overseas Money

    Foreign investment in
    telecommunications will probably be limited to changes in ownership that do
    not bring in new hard currency. The electric energy sector is still awaiting
    clear, concise rules to be defined. Therefore any new foreign involvement
    in this area, which is prone to political meddling, should not be expected

    Infrastructure ventures
    in highways, ports, railways, sewers and water works do not appear to be attracting
    much interest on the part of foreign investors, unless some Arab money should
    appear as a result of Lula’s recent costly visit to the Middle East. Such
    investments have a slow rate of return and are susceptible to changing rules.

    Since New Years Day, American
    visitors to Brazil arriving by plane must be photographed and fingerprinted.
    Due to a lack of preparation for this measure, apparently designed to get
    even with the US for their imposing similar procedures for arriving foreigners
    from many third world countries including Brazil, delays of more than an hour
    have resulted. My guess is that this requirement will either not last long
    or cause a diplomatic flap that may be blown out of proportion.

    Brazil has formerly asked
    the US for it to be removed from the list of countries whose citizens are
    subject to this treatment upon arrival to the United States. Until such a
    request is granted by US border control, visiting Americans can expect to
    wait. My only advice is to bring some wash ups to clean ones hands after the
    finger printing exercise.

    The stock market closed
    2003 at a record high and may act as a magnet for continued speculation from
    overseas. P/E ratios are still much lower that those in the US and Europe.
    That may compensate for the inherent risks in investing in the Brazilian stock
    market that was among the world’s best performers in 2003.

    As international financial
    markets begin to evaluate the risks and opportunities that Brazil offers in
    2004, it should be kept in mind that fresh money in addition to the roll over
    of maturing debt must be attracted if Brazil is to remain current with international

    Total foreign debt of
    more than US$ 200 billion is manageable so long as local conditions are not
    perceived as worsening and events outside of Brazil do not cause a contraction
    of lending and investing in risky parts of the world. All indications at this
    point in time are that Brazil will pull through.

    The stand-by agreement
    with the IMF as well as Standard & Poors’ recent upgrading of certain
    forms of Brazilian debt should make investors comfortable. The so-called Brazil
    risk factor is at its lowest since 1998 and C bonds are selling at nearly
    face value.

    The real is holding steady.
    Few people anticipated this rosy scenario in the months leading up to the
    presidential election in October of 2002. I was not one of them and I continue
    to be somewhat leery of Lula and his cohorts.

    The PT or Workers Party
    seems to be moving toward the center politically. Four of its founders and
    more vocal dissidents have been recently expelled from the ranks. These people
    and others within the party are not pleased with the moderation and pragmatism
    that Lula has displayed since assuming office January 1st of 2003.
    Cabinet changes are expected in the near future as the PMDB grabs two or three
    of the thirty-five ministerial level posts.

    This fractured party has
    assisted in passing what remained of the tax and pension reform bills that
    Lula submitted to congress with much fanfare early in 2003.

    The "Tax Reform"
    bill has amounted to little more than a tax increase and an extension of the
    tax on checks and financial transactions, known as CPMF. "Pension Reform"
    in its present shape will do little to reduce the net cost of public sector
    pensions in the near future.

    The roughly three million
    persons who worked in the public sector are by far the most heavily subsidized
    group among retirees. Within this minority there are many on minimum salary
    benefits but there are also some absurd privileges that mock any concept of
    social justice.

    Current changes have done
    little to remedy this situation since congressmen and senators are not willing
    to reduce their own future pensions or those of judges and other members of
    this privileged caste. The numerical effect of what has been voted has yet
    to be determined.

    Congress has been convened
    for another expensive special session during the January and February vacation
    months. The purpose of this convocation, other than to line the pockets of
    the legislators with taxpayers hard earned money, is vague. Little will be
    accomplished in Brasília this year because of the municipal elections
    in October.

    The government propaganda
    machine will be working full time to convince Brazil’s voters that the PT
    is doing a great job and therefore their candidates for mayor should receive
    their votes. The outcome of these elections may determine the future of the
    PT’s dominance of power.

    Credit must be given to
    the performance of Antonio Palocci as Finance Minister. He has managed to
    gain confidence of the markets, both local and abroad, with sensible monetary
    policy. At the cost of zero growth, or close to that for 2003, the increased
    government debt has been stretched out with the dollar denominated portion
    falling from 37 percent to 22 percent during 2003. Inflation has been reined
    in at 9 percent for 2003 and is expected to drop to 6 percent this year, a
    good trick if it can be accomplished.

    If Palocci can stand up
    to the clamor for growth and renegotiation of the states’ debt to the federal
    government in an election, year remains to be seen. Thus far Lula has given
    Palocci his full backing.

    This is a crucial year
    for Brazil as expectations have been fueled by frequent expressions of optimism
    on Lula’s part. Creation of jobs by an expanding economy is essential to Lula’s
    retaining credibility among the less than well-off portion of the population
    that helped elect him. Thus far few concrete results are visible.

    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


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