VZCZCXRO3412
RR RUEHRG
DE RUEHBR #1272/01 3021310
ZNR UUUUU ZZH
R 291310Z OCT 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5298
INFO RUEHSO/AMCONSUL SAO PAULO 0016
RUEHRG/AMCONSUL RECIFE 0058
RUEHBU/AMEMBASSY BUENOS AIRES 6393
RUEHSG/AMEMBASSY SANTIAGO 0006
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHDC
UNCLAS SECTION 01 OF 04 BRASILIA 001272
SENSITIVE
SIPDIS
STATE FOR WHA/BSC, EEB/IFD/ODF
TREASURY FOR KAZCMAREK CKELLOGG
USDOC FOR 4332/ITA/MAC/WH/OLAC
USDOC ALSO FOR 3134/USFCS/OIO
USAID FOR LAC/AA
E.O. 12958: N/A
TAGS: EFIN EINV ECON BR
SUBJECT: BRAZIL: STAFFDEL MEECHAM - IFI/MDBs REVIEW
REF: A) BRASILIA 950
1. (SBU) SUMMARY: Officials from both the Government of Brazil
(GOB) and international financial institutions (IFIs) and
multilateral development banks (MDBs) operating in Brazil described
for Carl Meacham, Senator Lugar's senior foreign policy advisor on
Latin America, a shift from national level development lending to
the sub-federal level, and a relatively well organized national
policy that channels IFI/MDB lending to priority projects around the
country. Major IFI/MDBs in Brazil portray their relations with the
GOB as positive and collaborative, and work closely with the
Ministry of Planning, Budget and Management to align development
lending priorities. The Brazilian Development Bank (BNDES) has
grown into a powerful development lending body in Brazil, vastly
outpacing the efforts of all IFI/MDB activity in Brazil combined. A
meeting with the Ministry of External Relations (MRE) and the
Ministry of Finance indicates the GOB remains committed to pushing
for IFI reform in the near-term, particularly within the framework
of the G-20, but continues to struggle to gain the voice they
believe they deserve given their successful management of the global
financial crisis. END SUMMARY.
BACKGROUND
----------
2. (SBU) In response to Senator Lugar's request that the minority
staff of the Senate Foreign Relations Committee undertake a study of
IFI effectiveness and financial waste prevention, Carl Meacham
visited Brasilia and Sao Paulo October 19 - 21. Mr. Meacham met
with representatives in Brazil from the World Bank, Inter-American
Development Bank (IDB), Corporacion Andina de Fomento (CAF),
International Finance Corporation (IFC), International Monetary Fund
(IMF), Brazilian Development Bank (BNDES), Ministry of Exterior
Relations (MRE), Ministry of Finance, and Ministry of Planning.
(NOTE: approximate annual IFI lending in Brazil: World Bank, USD 5
billion; IDB, USD 3 billion; CAF, 1.8 billion; IFC, USD .5 to 1
billion. BNDES lending surpasses USD 50 billion. END NOTE).
BRAZIL'S ECONOMIC RECOVERY
--------------------------
3. (SBU) GOB officials and IFI bankers expressed universal optimism
that Brazil has successfully managed itself out of the global
financial crisis; many declaring that Brazil was one of the last of
the world's major economies to be pulled into the downturn, one of
the least impacted, and the first to raise itself out of the crisis.
By most macro indicators, Brazil has indeed entered into a recovery
position (reftel A). (NOTE: Brazil is projected to end 2009 with
near flat GDP growth, and reach four to five percent growth in 2010.
END NOTE).
IFI/MDB LENDING SHIFT TO SUB-FEDERAL LEVEL
-----------------------------------------
4. (SBU) Mr. Meacham's meeting with Alexandre Abrantes, the World
Bank's Program Manager - Portfolio and Operations, detailed a
gradual shift in World Bank lending from the Brazilian federal
government level to the state and municipal level. The World Bank
is extending USD 4.0 billion to sub-federal governments in the
current year, approximately 70 percent of their lending activity in
Brazil. By contrast, only USD 300 million went to state and local
governments in 2006. Abrantes attributed the shift in lending to
President Lula, who, confident with growing foreign reserves,
steered IFI lending away from the federal level but asked that
institutions redirect efforts to the state and municipal level. IDB
country representative, Jose Luis Lupo, whose bank now exclusively
extends loans to the state and municipal level (approximately USD 3
billion per year), echoed the World Bank's assessment crediting Lula
for encouraging the shift in the lending landscape.
5. (SBU) Under Secretary for International Affairs Alexandre Rosa
from the Ministry of Planning, Budget and Management (who's Minister
is Brazil's IDB Governor) provided additional government perspective
on the shift from federal to sub-federal lending. He described a
complete reversal in IFI/MDB lending from six years ago when almost
all lending was directed to the federal level, to the current
environment where almost all lending, approximately 90 percent, is
conducted at the state and municipal level. Rosa explained that
this shift coincided with the federal government's fiscal adjustment
BRASILIA 00001272 002 OF 004
period which produced primary budget surpluses (government revenue
collections minus spending before interest payments) and growing
international reserves. He added that the federal government
maintains isolated small scale lending activities with the IFI/MDBs
but that these projects are intended to transfer technical expertise
and bolster long-term relationships with the IFI/MDBs as opposed to
supplement federal budgets.
POSITIVE RELATIONSHIP BETWEEN IFI/MDBs AND GOB
------------------------------------------
6. (SBU) In their separate meetings, the World Bank's Abrantes and
IDB's Lupo agreed that relations between the IFI/MDBs in Brazil and
the GOB are strong. Abrantes commented that, "Brazil knows what it
wants, is efficient compared to other countries, and has no
political hang-ups." Lupo expressed a similar sentiment, saying,
"Brazil respects institutionality and the rule of law, and has not
gone down the path of threatening private ownership and wrecking the
economy." Both development bankers also cited collaborative working
conditions with the GOB, specifically with the Ministry of Planning;
a sentiment that was also expressed by the CAF representative in
Brazil, Moira Paz-Estenssoro. Abrantes commended the World Bank
Country Partnership Strategy, a process that occurs every four
years, timed to coincide just after the country's presidential
elections, to coordinate development lending priorities between the
IFIs and the Ministry of Planning. More frequent communications
occur through the Ministry of Planning's COFIEX (External Financing
Commission), which coordinates ongoing IFI/MDB lending and project
oversight within Brazil's public sector.
7. (SBU) In the meeting with the Ministry of Planning, Under
Secretary Rosa also provided additional details on the IFI/MDB
landscape in Brazil. Rosa explained that every state in the country
and many of the large municipalities have direct relationships with
the IFI/MDBs. Rosa's role within the Ministry of planning is to
coordinate these relationships and track the amount of lending and
project types through mechanisms like the Country Partnership
Strategy and COFIEX. Rosa described a positive and collaborative
relationship between the GOB and IFI/MDBs, but admitted that there
was a period of confusion as the Ministry of Planning adjusted for
the shift in development lending from the federal level to the local
level approximately six years ago.
SAO PAULO IFC PERSPECTIVE: PRIVATE SECTOR, NICHE FOCUS
---------------------------------------
8. (SBU) IFC Country Manager Andrew Gunther and Investment
Officer, Daniel Susa reported to Meacham in Sao Paulo that the IFC
plays a niche role in Brazilian project finance (between USD 500
million and USD 1 billion per year), noting their comparatively
small presence in the country next to heavyweight BNDES (NOTE: both
BNDES and IFC focus on private sector. END NOTE). Nevertheless,
Gunther emphasized that IFC loans are an attractive option for
medium-sized companies looking to access international credit for
the first time and raise their loan profile. IFC focuses on
targeting profitable projects with maximum development impact,
concentrating on three main loan programs: low-income families for
educational purposes and microfinance; promoting competitiveness;
and climate change and renewable energy. Gunther said IFC has only
limited engagement with the Brazilian public sector, but does
coordinate with the World Bank on some projects at the sub-national
government level and in defining strategic priorities.
IMF SAYS BRAZIL IS GAINING STATURE
----------------------------------
9. (SBU) In a meeting with the IMF in Brazil, Resident
Representative Paulo Medas said that the Brazil-IMF relationship
underwent a dramatic improvement since Brazil paid off its final
tranche of IMF loans in 2005, and that the IMF is encouraging Brazil
to take on greater participation in IMF policy. Medas described an
evolution in the relationship between Brazil and the IMF, developing
from a situation where Brazil felt mistreated to one where Brazil
feels comfortable playing a leadership role within the IMF,
especially through the G-20. On G-20 and IMF coordination, he said,
"in the last two G-20 meetings, Brazil has really gotten a sense of
how to work through the G-20, and has learned how to cooperate,
negotiate, and compromise." According to Medas, Brazil sees the
G-20 as their best way to effect change within the IMF, including on
BRASILIA 00001272 003 OF 004
their high priority goal of gaining greater representation for
emerging economies. He added that while the United States has been
supportive of a quota shift from developed to emerging nations,
Europe, especially the smaller European countries, has been less
enthusiastic to give up representation.
10. (SBU) Despite improving relations, Medas said Brazil still
exhibits an "anti-Fund" mentality from time to time, has not fully
embraced the G-20 negotiation process and, further, cautions Brazil
to be more sensitive to regional concerns. Brazil, according to
Medas, remains resistant to IMF technical assistance and
instruction, but added that Brazilian ministries have recently
showed signs of technical engagement, making specific requests for
IMF visits and expertise. Prior to the last two G-20 meetings,
Medas said Brazil routinely derailed emerging market consensus, but
contends Brazil has matured into a more constructive partner. He
added, however, that Brazil must still fully adopt the G-20
negotiation process and said their continued reluctance in this area
continues to draw international criticism, including from French
Finance Minister Christine Lagarde, who Medas said delivered the
message during a recent visit to Brasilia last month. Medas also
said that Brazil's growing international clout has prompted
countries in the region to complain that Brazil is "more forceful
than the U.S."
MRE AND MINISTRY OF FINANCE, BIAS FOR ACTION AND REFORM
---------------------------------------
11. (SBU) In a joint meeting with the Ministry of External
Relations (MRE) and the Ministry of Finance, MRE's head for
international financial policy Luis Balduino raised GOB's interest
in IFI reforms, and expressed that Brazil's current political
situation is very conducive for near-term progress on IMF reform.
He reiterated that Brazil wants to see a reformed IMF that is more
flexible and agile, and more responsive to the needs of the
developing world. He commented that there is much less debate in
Brazil than in the United States with respect to supporting IFIs.
As an example, he said that when Brazil committed the USD 10 billion
to the IMF, the move was almost universally accepted in Brazil, even
within the opposition political parties. Balduino suggested that
the political environment in the country was supportive of Brazil
encouraging IMF reform within the next two years, but also added
that the United States "should not be too pushy" in asking for
additional contributions and specific priorities as Brazil considers
its role and options.
12. (SBU) Artur Lacerda, who monitors World Bank issues at the
Ministry of Finance, said that Brazil wants to see reforms in the
World Bank that strengthen its institutional capacities to address
the global issues of the day: climate change, poverty reduction, and
development. He added that Brazil is concerned the World Bank has
strayed away from its core role as a development institution.
Lacerda's colleague at the Ministry of Finance who covers the IMF
portfolio, Ludmila Silva, said that Brazil is now the largest IMF
donor from the developing world (NOTE: referring to Brazil's recent
USD 10 billion commitment to the IMF. END NOTE.), and has shown
true engagement and knowledge of the institution, yet its
contributions are still not fully recognized in the IMF.
BNDES - 1,000 POUND GORILLA
---------------------------
13. (SBU) A meeting with representatives from the Brazilian
Development Bank BNDES, which according to Abrantes provides more
lending in Brazil than the World Bank does throughout the entire
world, revealed the extend to which the federally-controlled bank
dominates development lending in Brazil. According to Ilge
Iglesias, Congressional Affairs Advisor to the bank's CEO, BNDES
constitutionally receives 40 percent of a social security and
unemployment benefit payroll tax collection (FAT) which is
consolidated into the bank's operating budget and used to fund the
bank's lending activities. The bank has grown significantly over
the last several years, from approximately USD 19 billion worth of
lending in 2003 to over USD 50 billion in 2008, to the point where
proceeds from existing operations produce 50 to 60 percent of
revenues, and the FAT now only comprises 3 to 4 percent. BNDES also
receives funding through presidential executive decrees, which have
increased significantly as President Lula directs additional funds
to BNDES to fuel the government's growth acceleration infrastructure
BRASILIA 00001272 004 OF 004
program (PAC).
14. (SBU) According to Iglesias, BNDES has undergone its own shift
in operations since Lula assumed the presidency in 2003. While Lula
encouraged the IFI/MDBs in Brazil to reallocate lending from the
federal level to state and local governments, he transformed BNDES
into a powerhouse banker for Brazil's largest development projects
around the country. In contrast to IFI/MDB lending which is
comparatively more focused towards public sector lending, BNDES
lending, according to Ministry of Planning's Rosa, is 80 to 85
percent directed to private and state-owned enterprises. Lula also
liberalized BNDES's lending operations, terminating strict lending
conditions that were in place under the previous Fernando Enrique
Cardoso presidency. Iglesias and Isamara Seabra, BNDES Manager of
Government Relations, believed that BNDES's current focus would not
change under either one of the leading presidential candidates for
the 2010 elections, Dilma Rousseff or Jose Serra.
15. (SBU) Meetings in Brasilia produced mixed views on BNDES
ambitions to undertake future development activities outside of
Brazil. Iglesias and Seabra contended that BNDES did not have a
serious interest in partnering with other emerging and developing
market countries on development lending strategies, while Ministry
of Planning's Rosa cited case examples of BNDES helping both
Argentina and Peru build capacities. BNDES and Planning were both
in consensus that BNDES's current primary international strategy is
to assist Brazilian companies expand and export abroad. (NOTE:
BNDES currently has international offices in Montevideo and London.
END NOTE).
COMMENT
-------
16. (SBU) Carl Meacham's meetings in Brasilia and Sao Paulo shed
light on Brazil's IFI/MDB lending environment in the wake of the
global financial crisis. As the IMF Resident Representative in
Brazil, Medas, pointed out, Brazil's comparatively successful
management of the global financial crisis has bolstered its
confidence, and encouraged the GOB to be a more constructive and
vocal partner within the G-20 and IMF. As Brazil continues to post
impressive macro "numbers" relative to the rest of the world, and as
President Lula aspires to leave his mark on the G-20 and
international fora, the GOB will push especially hard for reform
within institutions like the IMF and World Bank. On the other hand,
Brazil's evolving interest, and past baggage, affects relations with
the IMF, and the reluctance of some developed economies to fully
embrace Brazil's perspectives may continue to leave Brazil feeling
more on the outside rather than in their desired role as leading
voice for broad IFI reform. END COMMENT.
17. (U) This cable was coordinated/cleared by Consulate Sao Paulo
and Senate Senior Staffer Carl Meacham.
KUBISKE