Cablegate: Meirelles: Brazil's Economy has Fundamentally

Published: Fri 16 Apr 2004 05:07 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
REFS: A) Rio de Janeiro 363 B) Brasilia 786
C) Brasilia 657 D) Brasilia 613
1. (SBU) Summary. Central Bank President Meirelles, target
of sustained political attacks over Brazil's continued high
interest rates and unemployment plus popular perceptions
that the economy is worsening, has unrepentantly asserted
that Brazil's economy not only is growing, but has undergone
a fundamental positive shift. For the first time in its
history, he told the press on April 5, Brazil's economy,
exports and trade surplus are growing at the same time;
moreover, the Central Bank is now even predicting a slight
current-account surplus this year, second in a row.
Meirelles' thesis is that Brazil's maintenance of trade and
current account surpluses even with the current double-digit
growth in imports results not just from weak growth and the
fall in real income but from an evolution in Brazil's
economic structure. His implication is that Brazil has
already largely freed itself from its historic external
financial vulnerability, i.e., the old trade-off between
domestic growth and external deficits, which has long
contributed to the stop-and-go nature of growth here. End
2. (U) As Meirelles departed after speaking to an April 5
Rio de Janeiro Commercial Association lunch (ref A), he
commented to the press that economic analysts of Brazil were
missing a major point: not only has growth returned, but
Brazil is for the first time simultaneously experiencing GDP
growth, export growth and trade-surplus growth.
Traditionally in Brazil, as growth boosted incomes, demand
for goods, sucked in imports and diverted local products
from export to domestic markets. Standard result:
burgeoning trade and especially current-account deficits.
This tension between growth and external deficits has been
at the heart of Brazil's stop-and-go growth cycles for
thirty years. Its lessening since 2001 amounts to a
"fundamental change," and it will take a while for everyone
to perceive it, Meirelles said to the press after his
3. (SBU) Assessing Meirelles' claim is not straightforward.
Brazil's 2003 trade and current account surpluses had a lot
to do with depressed import demand resulting from weak
economic growth and depressed real incomes. Imports in 2002
and 2003 dropped to $47.2 billion and $48.2 billion,
respectively, from $55.6 billion in 2001. Meanwhile,
exports were surging, spurred by the competitive effect of
devaluation and by rising commodity prices. WTO figures
show Brazil's 2003 exports of $73.1 billion moved it up
modestly in the rankings to become the world's 25th largest
exporter. An economic advisor in the Ministry of Planning
has told us that the GoB now is forecasting exports of about
$85 billion this year (growth of almost 20%), and imports of
about $61.5 billion (up 27.6%), for a trade balance of
around $24 billion. In line with that expectation, the
first quarter trade surplus, according to the latest
figures, was $6.17 billion. A Central Bank director told us
that, given these trade surplus results, the GoB is now
predicting a small current account surplus this year, which
would be Brazil's second in a row. The GoB's original
forecast in late 2003 was for a USD four billion current-
account deficit.
4. (SBU) For Meirelles to be right about the fundamental
nature of this shift in Brazil's export competitiveness and
orientation, the surge in exports must be accounted for by
more than simple devaluation. Former chief economic advisor
to the Planning Ministry Jose Carlos Miranda argues that
productivity increases in Brazilian industry played a
substantial role in export growth in 2002/2003. In a March
23 meeting, Miranda, now head of the Ministry's
international department, told us that investments in
updated plant and equipment since 2000 had significantly
increased productivity growth in Brazil's industry,
particularly in machine building. While it is difficult to
untangle the competitive effects of devaluation of the Real
over 2002-2003 from the productivity growth, Miranda argued
that the continuation of double-digit export growth even
after the Real's revaluation starting in late 2002 points to
the existence of a structural shift, which he attributes to
that productivity growth. The fact that Brazil now is
exporting tractors to the U.S. and EU exemplifies these
productivity increases as well as the growing sophistication
of Brazilian industry, according to Miranda.
5. (SBU) If Meirelles is right that Brazil's economy is
already recovering strongly and will register substantial
growth in 2004, then the prospect of a simultaneous large
trade surplus (perhaps even a current-account surplus)
despite double-digit-import growth this year, would indeed
seem a potential watershed. This element in Meirelles'
argument is still open to dispute, however. As pointed out
in Ref B, various recent data points in this context have
been inconclusive or negative. Nor have we yet seen any
empirical data to quantify the degree to which export
results since 2001 have been gained by other than favorable
world-commodity-price and foreign exchange movements.
6. (SBU) Perhaps the most striking aspect of Meirelles
argument is the light it sheds on his own and the Central
Bank's apparent beliefs and motives in persisting with the
Central Bank's steady policy of holding the monetary line
despite the intensified hail of political accusations that
he is an extreme dogmatist out of touch with the real
economic world (Refs B, C and D). But, even if Meirelles
and Miranda are wrong about Brazil's economy already being
in the process of a fundamental and permanent shift,
exports' performance this year should at a minimum be good
enough to postpone for a while worries about Brazil's
external position.
7. (SBU) In any case, sustaining strong export growth will
require that Brazil implement the sorts of microeconomic
reforms that attract significant infrastructure investments,
particularly to de-bottleneck the ports and transportation
systems. And though Brazil's exports meanwhile continue to
benefit from incremental expansions in world markets, its
dogmatic negotiating stances in the FTAA and WTO Doha Round
will hobble the kind of structural adjustment Meirelles
claims is occurring.
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