VZCZCXRO1747
RR RUEHRG
DE RUEHSO #0531/01 2521726
ZNR UUUUU ZZH
R 091726Z SEP 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9554
INFO RUEHBR/AMEMBASSY BRASILIA 0689
RUEHRG/AMCONSUL RECIFE 4422
RUEHRI/AMCONSUL RIO DE JANEIRO 9245
RUEHBU/AMEMBASSY BUENOS AIRES 3617
RUEHAC/AMEMBASSY ASUNCION 0002
RUEHMN/AMEMBASSY MONTEVIDEO 2961
RUEHSG/AMEMBASSY SANTIAGO 0002
RUEHLP/AMEMBASSY LA PAZ 4141
RUCPDOC/USDOC WASHDC 3285
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC
UNCLAS SECTION 01 OF 02 SAO PAULO 000531
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV BR
SUBJECT: BRAZILIAN BUSINESS SEES RECOVERY UNDERWAY
REF: (A) SAO PAULO 320; (B) BRASILIA 950
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY
1. SUMMARY: Following two quarters of economic contraction, most
Brazilian private sector representatives agree the local economy is
solidly on the road to recovery. Restored domestic consumer
confidence and strong domestic demand are fueling business optimism.
Underlying factors contributing to quick turnaround include
increased financial sector lending, rising retail sales driven by
government tax measures, relaxed monetary policy, and recovering
commodity prices. Brazil has seen relatively less progress in
recuperating pre-crisis levels of investment spending and industrial
production. Overall 2009 annual GDP growth may still fall slightly
negative, but Brazilian business is planning for robust growth
around four percent in 2010. Sustaining this level of growth amid a
weaker global recovery, however, will remain a challenge. END
SUMMARY.
------------------------------
Banking Sector Leading the Way
------------------------------
2. (U) The banking sector has spearheaded Brazil's recovery, among
the 14 major sectors, generating USD eight billion in revenues
during the first half of this year. State-owned Banco do Brasil has
regained its position as Latin America's largest bank and boosted
profits by 43 percent, as a result of a government-mandated measure
to lower interest rates and lessen lending restrictions. Banco do
Brasil's total lending expanded 33 percent, compared to 15 and 18
percent by Itau Unibanco and Santander, the second and third largest
Brazilian banks, respectively. Banco do Brasil's average interest
rate for consumer credit was 34 percent in July, compared with 61 at
Itau and 80 at Bradesco, according to Brazil's Central Bank.
(Comment: Brazilian banks enjoy some of the highest interest rate
spreads in the world, as the above numbers demonstrate.) In August,
Finance Minister Guido Mantega publicly credited
government-controlled banks' increased lending for helping the
nation out of its first recession since 2003, while domestic media
has criticized private banks such as Itau Unibanco and Santander for
not implementing similar measures.
3. (SBU) Rubens Sardenberg, chief economist at the Federation of
Brazilian Banks (FEBRABAN), told Econoff that private banks are not
concerned about the criticism generated by the media, as business
remains strong for these banks. He attributed the greater lending
prudence followed by private banks as a measure to secure stable
long-term payments. However, Marcelo Carvalho, Chief Economist at
Morgan Stanley, suggested to us that private banks lost a
significant opportunity to expand their customer base by not
lowering rates along with Banco do Brasil earlier in 2009. With the
Brazilian economy now solidly in recovery, he expects both public
and private banks to further boost efforts to facilitate access to
credit.
--------------------------------------------- --
Rising Confidence & Commodity Prices Boost Real
--------------------------------------------- --
4. (SBU) Meanwhile, as a result of GoB expansionary measures such as
automotive, household appliances, and electronics tax breaks,
private sector consumption has proven resilient. For example, June
retail sales grew by 5.6 percent from a year ago, with computer
equipment sales increasing as much as 15.6 percent. The boost in
retail sales indicates a recovery in consumer confidence while
business confidence indicators have also recovered by 25 percent
since February, according to Morgan Stanley research, with data from
the Gertulio Vargas Foundation. Together, the rising confidence
levels are spurring optimism among our Morgan Stanley and Santander
contacts that the economy is poised for a strong GDP growth in 2010
around four percent.
5. (SBU) A rebound in average commodity prices, climbing 31 percent
in dollar terms since the end of February, is another key factor
contributing to Brazil's economic rebound. Commodities represent
about half of Brazil's total exports, according to Morgan Stanley's
analysis. (Note: Morgan Stanley's definition of commodities includes
meat products such as chicken, beef, pork, as well as
semi-manufactured goods such as soybean products. End Note.)
SAO PAULO 00000531 002 OF 002
Commodity gains are also boosting share prices. Brazil's Bovespa
index has jumped 52 percent so far this year on speculation that a
rebound in commodity prices and record-low interest rates will
bolster economic growth. Greater-than-expected international demand
for Brazilian products, particularly from China, is also
contributing to analysts' optimism for a robust recovery.
6. (SBU) Higher retail sales, export levels and commodity prices are
fueling the appreciation of Brazil's real, which has strengthened 27
percent against the dollar this year and is expected to close 2009
at 1.8 real per USD. Since January 1, Brazil's real is the
best-performing currency among all 171 currencies tracked by
Bloomberg. Standard Chartered, a London based bank, predicts
Brazil's real will climb 18 percent by the end of 2010, reaching an
11-year high of 1.55 reais per USD.
-------------------------------
Countercyclical Monetary Policy
-------------------------------
7. (SBU) While many in the business community believe that interest
rates are still too high, most acknowledge that the Central Bank's
aggressive cuts of 500 basis points to the benchmark SELIC rate
since last year have spurred economic growth. However, with the
expansionary monetary cycle seemingly winding down following the
Bank's September 3 decision to keep the SELIC rate at 8.75 percent,
criticism from the influential Sao Paulo Federation of Industries
(FIESP) for more interest-rate cuts has grown. FIESP and others
argue that, unlike the 2003 crisis, inflation remains near the
Bank's target rate of four percent which provides room for further
monetary loosening.
----------
Comment
----------
8. (SBU) Brazil, unlike in previous economic crises, appears to be
recovering faster than other more developed nations. Current market
consensus is that Brazil's economy almost certainly will grow at
around four percent next year. As our business interlocutors note,
its success is due to internal economic stimulus policies, strong
domestic demand and external variables such as recovering commodity
prices. Nevertheless, they agree that expanding access to credit
remains key to future economic growth, and a full recovery to
pre-crisis levels of investment and industrial production remain key
goals for 2010.