Cablegate: Brazil: Private Sector Views of the Brazilian Economy Over

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SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV BR
SUBJECT: BRAZIL: PRIVATE SECTOR VIEWS OF THE BRAZILIAN ECONOMY OVER
THE NEXT 10 YEARS

REF: 09 SAO PAULO 630; SAO PAULO 18; BRASILIA 1354

1. (SBU) Summary: Emerging from the global economic crisis, private
sector leaders are generally confident that Brazil's economy will
continue to grow over the next decade based on strong investment
opportunities, stable macroeconomic policies, and favorable
demographic and external factors. Nevertheless, uncertainty
remains as to whether the economy may overheat in the next few
years and, over the longer term, if it will grow at levels high
enough to significantly reduce remaining poverty and income
inequality. Most analysts agree that in order for Brazil to
achieve such sustained growth, the next GOB administration must
pass pending economic reforms in areas such as taxes, labor, and
infrastructure. End Summary.

Investment Opportunities and Domestic Demand to Spur Growth

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2. (SBU) Leading Brazilian bank Itau Unibanco estimates that the
Brazilian economy is likely to grow over the next decade at an
average of 4.5 percent annually. The main drivers for this growth
include a significant boost in expected investment in areas such as
energy, including the offshore pre-salt oil development anticipated
through 2025, and public infrastructure. According to Mauricio
Oreng, economic analyst at Itau, private research suggests that
investment in the pre-salt oil fields will exceed $55 billion over
the next ten years. Likewise, research institutions such as
Fundacao Getulio Vargas predict continued strong demand from a
growing domestic sector and Brazilian middle class (ref A). Fabio
Pina, economist for the trade association Fecomercio, similarly
emphasized to us that Brazilian economic output will benefit from a
demographic increase in the share of working age population through
2020 which will relieve some pressure on public pensions and
increase the labor pool. Externally, the current global context
favors investment in emerging economies such as Brazil with high
potential to expand domestic consumption.

3. (SBU) Additionally, world events such as the 2014 World Cup and
2016 Olympics to be hosted in Brazil will require a significant
boost in investment in sports facilities, hotels, transportation,
and urban development, which will stimulate growth in the
construction and services sectors. According to Aurelio Bicalho
economist at Itau, the Rio Olympic Games are likely to contribute a
0.7 percent increase in GDP growth in each of the four years
preceding the 2016 event. Beyond the immediate impact of the World
Cup or Olympic Games, leading private sector associations, such as
the Sao Paulo Federation of Industries (FIESP) have welcomed the
events in the hope that resulting improvements in transportation
infrastructure boost long-term productivity and lower a key cost of
doing business in Brazil.

Most Economic Policy to Remain Unchanged

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4. (SBU) Few private sector observers expect a significant change
in current macroeconomic policies, regardless of who wins the 2010
presidential elections. Economic contacts such as Brazil's Central
Bank (BCB) Senior Analyst Alexandre Pundek, Itau's Oreng, and
Santander's chief economist, Alexandre Schwartsman, agree that both
leading presidential candidates--Dilma Rousseff from the governing
Workers' Party (PT) and Sao Paulo Governor Jose Serra from the
Social Democratic (PSDB) party-- are committed to maintaining

economic stability for Brazil's growth. Pundek told Econoff that
both candidates recognize the current economic model is reducing
poverty and strengthening the middle class.

Monetary Policy May Loosen

---------------------------

5. (SBU) One possible area of moderate divergence is monetary
policy, where Serra has long been a critic of high Central Bank
interest rates. While many in the private sector expect rates to
rise over the next year, as much as four percent according to
Citibank's President Gustavo Marin, PSDB contacts such as Federal
Deputy Walter Feldman and independent analysts such as Moody's
Latin America Director Luiz Tess tell us they expect a Serra
administration would try to bring rates below Brazil's historic
average to accelerate growth. Given the Central Bank's general
autonomy in recent years and broad aversion to stoking inflation,
our contacts agree inflation will remain under control, though the
target range could be slightly higher under a Serra government.
One key factor on monetary policy in the next GOB administration
will be the leadership of the Central Bank. Numerous contacts in
the financial sector, including Pundek at the Central Bank, have
pointed to speculation that current Central Bank Governor Meirelles
may stay on as BCB Governor under either administration, as
evidence that monetary policy would not change dramatically.

Economic Obstacles Likely to Remain

-------------------------------------

6. (SBU) Although strong investment inflows, stable economic
policies, a favorable global climate for emerging markets, an
expanding domestic market, and positive demographic trends, are
likely to boost Brazilian economic growth, doubts remain about
long-term sustainability, deep-rooted poverty and lagging
competitiveness. President Lula has publicly predicted that
Brazil's economy will grow to fifth largest in the world by 2016,
and a study by PriceWaterhouseCoopers published on January 22,
predicts this could happen by 2013. However, skepticism is
prevalent among private sector contacts as to how growth will
address income inequality, poverty, and competitiveness issues. In
conversations with business association leaders such Roberto Costa
de Teixeira from CEAL and Roberto Giannetti da Fonseca from FIESP,
optimism about Brazil's economic outlook is tempered with concern
that opaque and onerous tax and labor requirements, high
transportation costs due to poor infrastructure, and weak
investment in human capital will continue to constrain growth and
poverty reduction. Despite broad consensus on the need for tax and
labor reforms as well as greater investment in public
infrastructure and education, views are mixed on whether the next
GOB administration, whether led by Rousseff or Serra, is likely to
tackle the challenge during the next five years. Pessimists,
including Schwartsman, suggest that any GOB administration emerging
from the 2010 elections is unlikely to have the political support
to push sensitive tax and labor reforms. However, others, such as
Luiz Fernando Figueiredo, Chief Portfolio Manager at Maua
Investimentos, and Octavio de Barros, Chief Economist at Bradesco
Bank, have told us they expect both candidates to recognize the
limited political window to address these issues and propose at
least partial reforms early in their tenure. According to Barros,
reforming the tax and labor regimes would boost economic growth by
at least 1.5 percent of GDP annually. Finally, near-term concerns
exist that increased government spending may be eroding the GOB's
recent record of solid fiscal management (ref C).

Comment

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7. (SBU) Brazil has made impressive progress in achieving sustained
economic growth and reducing poverty in recent years. Favorable
economic conditions and a broad political consensus on preserving
macroeconomic stability suggest Brazil, even without necessary
reforms, will continue to grow respectably over the next decade at
rates comparable to the 2003-08 period. Nevertheless, the
inefficiencies and infrastructure constraints identified by private
sector contacts remain a significant hurdle to achieving the higher
growth rates necessary to fully address Brazil's income inequality
and raise the country to "developed" within the next decade. End
Comment.
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