This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 BRASILIA 000463 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR SHANNON, DEMPSEY, CRUZ 
TREASURY FOR OASIA/SEGAL 
EXIMBANK FOR DIRECTOR FOLEY 
FED BOARD OF GOVERNORS FOR ROBATAILLE 
USDA FOR U/S PENN, FAS/FAA/TERPSTRA 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PREL PGOV BR
SUBJECT: BRAZIL: 2003 GDP GROWTH EVEN WORSE THAN EXPECTED 
 
REFS: (A) Brasilia 450, (B) 03 Brasilia 3682 
 
¶1.  (U) The GoB has revised its 2003 growth number downward 
from its already twice-downscaled estimate of positive 0.3%, 
to negative 0.2%, Brazil's worst since 1992.  In addition to 
being half a percentage point below its own most recent 
forecast, the growth figure was below those of even the most 
pessimistic market analysts, whose last predictions were in 
the range of -0.1% to +0.3. 
 
¶2. (U) Parsing the numbers on the supply side:  the 5% 
growth in agriculture (9% of the economy) was insufficient 
to offset declines of -1% in industry (about 38% of the 
economy) and -0.1% in the services sector.  On the demand 
side, private consumption was down 3.3% and government 
consumption up a modest 0.6%, while investment fell 6.6% -- 
particularly concerning, given the need for infrastructure 
investment to reduce Brazil's economic bottlenecks, notably 
in transportation.  The only unalloyed positive was exports, 
up over 14% on the year, helped by the competitive effects 
of the Real's devaluation in 2002. 
 
 
                        Brazilian GDP 
            Percent Growth - Seasonally Adjusted 
 
 
                 Annual/1      2003 Quarterly Growth/2 
               2002   2003    1Q03   2Q03   3Q03  4Q03 
 
Total GDP      1.9    -0.2    -0.8   -0.9    0.1   1.5 
 
Supply Side 
 - Agriculture 5.5     5.0     3.9    0.2   -6.4   7.3 
 - Industry    2.6    -1.0    -2.1   -3.5    2.6   1.2 
 - Services    1.6    -0.1    -0.7   -0.1    0.2   0.8 
 
Demand Side 
 - Consumption 
   (Private)  -0.4    -3.3    -1.5   -1.3    0.4   1.6 
 - Govt.       1.4     0.6     0.6    0.2   -0.1   0.1 
 - Investment -4.2    -6.6    -4.6   -6.8    2.3   4.0 
 - Exports     7.9    14.2    -1.7    4.4    1.2   5.5 
 - Imports   -12.3    -1.9     3.4   -2.1    0.4   8.3 
 
     /1 Percent Change on Previous Year 
     /2 Percent Change on Previous Quarter 
     Source: Statistics and Geographic Institute (IBGE) 
 
¶3.  (U) The GoB economic team, busily spinning the results, 
is pointing out the silver lining:  that growth rebounded to 
1.5% in the fourth quarter of 2003.  Agriculture as usual 
led the way on the supply side, with blazing 7.3% growth, 
followed by industry (1.2%) and services (0.8%).  Exports 
and investment led fourth-quarter demand-side growth. 
Exports grew 5.5%, and investment, encouragingly, grew for 
the second straight quarter (2.3% and 4%, respectively). 
Private consumption, the major component of demand, also 
rose for the second straight quarter, by 1.6%, after growing 
0.4% in the third quarter.  In extensive interviews over the 
weekend, Planning Minister Mantega and Treasury Secretary 
Levy maintained that these figures show the economy bottomed 
out sometime in the third quarter of 2003 and has been 
growing at a healthy clip since.  Lula has been quoted 
endorsing the same theme.  Even IMF Managing Director Horst 
Kohler, briefly visiting Brazil, got into the act, stating 
his belief that the Brazilian economy is on a "firm 
foundation" for substantial growth this year. 
 
¶4. (U) The GoB's argument is logical, but we have our 
doubts.  Multiple recent data points suggest the trajectory 
of economic growth in 2004 may prove far flatter than the 
1.5% growth of the fourth quarter of 2003 (slightly over 6% 
when annualized).  National unemployment has begun to climb 
again, to or towards new records, to 11.7% in January up 
from 10.9% in December (also up from 11.2% in January 2003). 
Per capita GDP was down 1.5% in 2003; this feeds through to 
average monthly incomes, down 6.2% in the twelve months 
ending in January 2004.  The Central Bank, after reducing 
its benchmark SELIC interest rate by 10 percentage points in 
the second half of 2003, has halted the decline in interest 
rates at 16.5%.  Given market expectations of 5.6% inflation 
over the next twelve months, this means a real interest rate 
of 10.9%, and commercial-bank spreads on lending to private 
entities remain far above even these double-digit levels. 
 
¶5.  (U) The trajectory of investment, up 2.3% in the third 
quarter of 2003 and a further 4% in the fourth quarter, is 
certainly promising.  But will it be sustained in 2004?  The 
national development bank (BNDES) reports that approvals for 
new financing were down 16%, and applications for financing 
down over 40%, year-on-year, in January; and according to 
the Central Bank total credit actually dipped from 25.4% to 
25.1% of GDP between December 2003 and January. 
 
¶6. (SBU) Admittedly, growth at even half the rate of the 
last quarter of 2003 would achieve the low end of the GoB's 
3-3.5% target for 2004.  A further question is the 
sustainability of even such moderate growth into the longer 
term.  By general consensus, this will depend on the GoB's 
timely achievement of a raft of proposed `microeconomic' 
reforms to reduce the rigidities of the Brazilian economy 
and further overhaul public finances.  Expectations for 2004 
in this line were always limited, and there is now also the 
prospect that the current corruption scandals will weaken 
Lula's legislative hand or distract the Congress from 
economic reform (Septel).  In sum, the advent of a solid GDP 
upturn still seems based more on hope than on facts. 
 
HRINAK