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
Hayes
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
region.
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
soon.
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
creditors.
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 192louvre@uol.com.br