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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.