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.

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 1^st 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