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UNCLAS SECTION 01 OF 04 SAO PAULO 000229 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR SCRONIN 
STATE PASS USTR FOR SULLIVAN/LEZNY 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO/DANDERSON 
AID/W FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PINR ETRD BR
SUBJECT: HOPES AND FEARS: BUSINESS COMMUNITY VIEWS OF BRAZIL'S 
UPCOMING ELECTIONS AND THE NEXT GOVERNMENT 
 
REF:  RECIFE 29 
 
SAO PAULO 00000229  001.4 OF 004 
 
 
¶1.  Summary: An informal survey of business leaders from Sao Paulo 
shows support for Finance Minister Antonio Palocci's macroeconomic 
policies and a general sense of relief that Lula's presidency has 
not destroyed the economy as originally feared.  Although Lula is no 
longer seen as a threat to the economy, he still makes many 
businessmen nervous.  If re-elected, they believe he is unlikely to 
make significant changes to the direction of the economy, as he will 
have to govern in alliance with such centrist and center-right 
parties such as the Brazilian Labor Party (PTB), the Liberal Party 
(PL), and the Brazilian Democratic Movement Party (PMDB).  The 
private sector has developed an agenda of issues it would like the 
next government to address, including tax reform, labor reform, 
reduction of public expenditures, and simplification of the 
regulatory environment.  The business community would prefer to see 
a candidate from the opposition Brazilian Social Democracy Party 
(PSDB) elected in the October presidential election, and many favor 
Sao Paulo state Governor Geraldo Alckmin, believing that he would be 
more capable than Sao Paulo Mayor Jose Serra of advancing their 
economic agenda.  End summary. 
 
-------------------- 
2006 ECONOMIC AGENDA 
-------------------- 
 
¶2.  The National Confederation of Industries (CNI), a business 
umbrella organization which represents state Federations of 
Industries (of which the most influential is the Sao Paulo State 
Federation of Industries - FIESP), is poised to publish its economic 
agenda for the post-election period, a guide for whomever is elected 
the next President.  The agenda reportedly has the concurrence of 
other business organizations.  Its main recommendations are: 
 
-- Cutting interest rates.  While business supports the Lula 
administration's macroeconomic policy, including its efforts to 
combat inflation, it believes that a speedier pace of interest rate 
reductions is possible. 
-- Control of public expenditures.  The Lula government has devoted 
more resources to social programs while withholding funds for 
investment.  The business community would like to see these 
priorities reversed. 
-- Greater public investment in infrastructure and implementation of 
public-private partnerships (PPPs).  The PPP idea was introduced 
during the government of Fernando Henrique Cardoso (FHC) to spur 
infrastructure investment.  Although the Lula government obtained 
Congressional approval of enabling legislation, currently the 
program exists mostly on paper. 
-- A clear regulatory framework for energy, telecommunications, 
transportation, and natural gas. 
-- A framework for environmental regulation that clearly defines the 
roles of responsible agencies in developing and enforcing the 
rules. 
-- Tax reform 
-- Labor law reform 
-- Public investment in technology (R&D) 
 
¶3. Of the items listed above, investment in infrastructure is 
considered the most urgent by many in the business community.  As 
the economy grows, so does demand for energy, roads, railroads, and 
port facilities.  FIESP believes the country's infrastructure is in 
such a critical state of obsolescence that it is adversely affecting 
the efficiency and global competitiveness of Brazilian companies. 
 
--------------------- 
BUSINESS PERSPECTIVES 
--------------------- 
 
¶4.  In 2002, Lula was generally seen by the private sector as a 
dangerous candidate.  With his labor union background and leftist 
orientation, he seemed to many to pose a threat to foreign 
investment and private enterprise in Brazil.  A turning point in his 
campaign was his "Letter to the Brazilians," in which he promised to 
 
SAO PAULO 00000229  002.3 OF 004 
 
 
respect international contracts and commitments and pay Brazil's 
debts, thus easing private sector fears. 
 
¶5.  Four years later, his performance is viewed with amazement. The 
business community had such low expectations for his presidency that 
now, though it may not approve of some of his policies, it considers 
his performance surprisingly good.  Nonetheless, some are still 
nervous, noting that Lula has not been tested by an international 
crisis and it is impossible to know how he would react under such 
pressure. 
 
¶6.  Another concern among business leaders is what Lula might do if 
it appears he might lose the election.  Would he undertake populist 
measures in an attempt to turn the tide? Would he be tempted to 
follow the example of Venezuelan President Hugo Chavez and stifle 
democratic opposition?  Would he abandon fiscal and monetary 
discipline, possibly re-igniting inflationary pressures?  No one is 
quite sure, which causes unease in the business community. 
 
¶7.  Lula has some, albeit not many, supporters among businessmen. 
One is CNI president Armando Monteiro Neto, a PTB federal deputy 
from the northeastern state of Pernambuco.  Monteiro owns a sugar 
factory and is extremely dependent on government loans and benefits. 
 Similarly, CNI and other such business organizations are highly 
dependent on the government for funding, which comes from business 
taxes paid by companies.  If the government were to suspend these 
mandatory contributions, it would force these organizations to find 
other sources of funds. 
 
¶8.  Other business supporters of Lula include Antoninho Marmo 
Trevisan (Trevisan Auditores e Consultores), Oded Grajew (founder 
and former CEO of Troll, a toy company), and Laurence Phi (owner of 
a large wheat mill), all of whom are progressive businessmen 
strongly tied to social causes.  They believe Brazil is a country 
lacking in social justice and that Lula is going to change this. 
Another businessman, Vice-president Jose Alencar - owner of 
Coteminas, Brazil's largest textile firm - entered into an alliance 
with Lula more out of political opportunism than commitment to 
Lula's social agenda.  More generally, the banking sector has 
supported Lula and has contributed generously to the PT; recently 
released figures show the banks earning record profits. 
 
¶9.  Although Lula has succeeded in obtaining the support of 
traditional elites that generally represent the Brazilian right, on 
many issues his government has not promoted the core interests of 
these constituencies.  These groups do not agree with the importance 
he accords to the landless movement and other social movements. 
They particularly deplore his administration's closeness to the 
Cuban, Venezuelan, and other left-leaning governments in Latin 
America, and a foreign policy which appears motivated more by 
ideology than by economic and commercial interests.  The left, for 
its part, is frustrated with the government's failure to deliver on 
its promise of new ideas.  Where they hoped to see more jobs and 
income for the poorest classes, Lula abandoned his party's platform 
to follow the pro-market economic policies of his predecessor. 
 
¶10.  Ultimately, while Lula is not, and never will be, a favorite of 
the business community, he is no longer seen as the threat to 
economic stability that he once was. If his poll numbers continue to 
improve as the electoral season progresses, he will likely attract 
more business interests (and contributions) to his side.  The more 
likely it appears that he will win, the more companies will want to 
jump on his bandwagon, and the less onerous his fund-raising 
challenge will be. 
 
----------------------------------- 
EXPECTATIONS FOR A LULA SECOND TERM 
----------------------------------- 
 
¶11.  During the last several months of 2005, polls showed that Lula 
could lose the election, and many speculated he might even decide 
not to run.  There was deep concern that, even if re-elected, he 
would face an extremely difficult second term.   His party was 
 
SAO PAULO 00000229  003.3 OF 004 
 
 
expected to be punished for corruption with a loss of Congressional 
seats, and there was general disillusion with his government.  More 
recent polls, however, show him recovering his popular support, and 
his government's approval ratings are returning to pre-scandal 
levels.  In part, this is due to recent positive economic figures. 
The GoB is also heavily investing in advertising: the President is 
announcing new social programs and investments (and trumpeting the 
success of existing ones) almost every day, and appearing on major 
network television every night (reftel). 
 
¶12.  Expectations for a Lula second term, should he win one, depends 
how he wins the elections.  There are three scenarios: 
 
-- Lula could win but still find himself in a weak position, with no 
strong political allies and a small cadre of PT deputies and 
senators.  In addition, he would face many difficulties, with little 
maneuvering room in Congress and a hard time getting legislation 
passed.  He would be unable to attract high-quality people to his 
cabinet.  In such a situation, he could turn to the social movements 
for support and begin to employ leftist rhetoric and populist 
measures.  Although unlikely, this is considered the most dangerous 
scenario. 
 
-- Lula could win by a large margin, with a working majority in the 
Congress, mainly from centrist small parties and the large PMDB. 
Since the PT isn't expected to do well in the congressional 
elections, Lula would be dependent on other parties in his electoral 
alliance.  Still, the large margin could provide him with some 
political capital and an ability to set an agenda and press for some 
important reforms.  One result would be a more centrist economic 
policy, without large or disruptive changes. 
 
-- Finally, there is a middle scenario, in which Lula wins but 
without enough support to guarantee a comfortable majority in 
Congress.  In this case, his second term would be very similar to 
his first one.  Without a consistent majority, Lula would have to 
negotiate the vote for each piece of legislation sent to the 
Congress and deal with difficult deputies from his own party and 
allied groups.  Under this scenario, a change in economic course is 
unlikely, as is a reform agenda.  The business community fears this 
eventuality, as it could lead to drift, deadlock, and stagnation. 
Many observers believe this is the most likely scenario. 
 
--------------------------------------------- 
THE PRIVATE SECTOR AND THE OPPOSITION TO LULA 
--------------------------------------------- 
 
¶13.  The majority of the private sector feels comfortable with the 
opposition PSDB because of its "neo-liberal" economic program. 
However, there is no consensus about which PSDB candidate should 
replace Lula.  Sao Paulo governor Geraldo Alckmin is by far the 
favorite among companies within the state.  One major supporter is 
Antonio Ermirio de Moraes, CEO of Votorantim Group, which owns 
banks, cement firms, and other enterprises.  FIESP President Paulo 
Skaf has also expressed support for Alckmin as the PSDB's "natural 
candidate."  During his administration, Alckmin has worked closely 
with the private sector and implemented some business-friendly 
policies, including tax cuts.  Accordingly, the local business 
community knows and trusts him. 
 
¶14.  Sao Paulo Mayor Jose Serra, on the other hand, still carries 
the stigma of being considered unpredictable and strong-willed.  He 
made enemies in the private sector while Health Minister under FHC. 
Serra opened the market for generic medicines, harming traditional 
pharmaceutical companies, and asserted Brazil's right to break 
patents on some HIV medications.  He also fought the tobacco 
industry. 
 
¶15.  In the economic arena, Serra seems to be more to the left than 
Alckmin - even more than Lula, say his opponents. During the FHC 
administration, Serra was part of the so- called "developmentalist" 
group of advisers in opposition to the "monetarist" group of Finance 
Minister Pedro Malan and Central Bank President Arminio Fraga. 
 
SAO PAULO 00000229  004.2 OF 004 
 
 
Thus, he faces some opposition from the financial sector and from 
some parts of industry, such as pharmaceuticals.  At the same time, 
he's considered very bright, well-educated, and determined.  What 
remains uncertain, and therefore a source of concern, is his 
economic management and the direction of his policies. 
 
------------------------------- 
THE PRIVATE SECTOR AND THE PMDB 
------------------------------- 
 
¶16.  The centrist PMDB is well-connected to the private sector. 
Most of its members in Congress were elected with help from one or 
another industry.  With no strong ideology, the PMDB could provide 
the political balance for either Lula or Serra, if one of them were 
to prevail in October. 
 
¶17.  The PMDB has two pre-candidates running for President - Anthony 
Garotinho, former Governor of Rio de Janeiro, and Germano Rigotto, 
Governor of Rio Grande do Sul.  Garotinho is considered by many 
business leaders to be a dangerous, populist candidate with strong 
ties to evangelical churches, and a relative newcomer to the PMDB. 
Rigotto is more mainstream but is unknown outside his own southern 
state.  However, if polls show Garotinho to be a viable candidate, 
Rigotto could become the party's alternative to the former Rio 
governor.  The PMDB is expected to participate in the next 
government one way or another, either with its own candidate or via 
an alliance with either the PT or the PSDB.  Even if the PMDB does 
not make an alliance to enter the next government, the party is 
expected to win enough seats in Congress to influence government 
policy through its parliamentary power.  Its presence in key Cabinet 
posts would give the private sector confidence that radical changes 
in financial and economic policy are unlikely.  Historically, the 
PMDB has kept the government in the center of the political 
spectrum, reassuring the economic players.  That's why both the PT 
and the PSDB are willing to negotiate alliances for the second round 
with the PMDB. 
 
------- 
COMMENT 
------- 
 
¶18.  Though we are still seven months from the election, the 
campaign has in some respects already begun and is generating 
attention.  What is striking, however, is how little the opposition 
pre-candidates have talked about policy - economic or any other - 
and, when they do, how little their proposals differ from each 
other.  Everyone wants lower interest rates and more growth.  Since 
Lula's macroeconomic policy has been a continuation of FHC's 
policies, the PSDB candidates haven't explained how they would 
change or improve it, only that they would implement it better and 
do a better job of fighting corruption.  In the meantime, the PMDB, 
which hopes to offer the voters a third way, an alternative to the 
two main contending parties, has yet to say anything new.  While 
there is a consensus in the business community that the next 
government needs to tackle long-standing and vexing problems - tax, 
labor, and regulatory reform - there is little confidence in the 
private sector that any new government (PT or PSDB) will have the 
political will and clout to push through the necessary legislation. 
End comment. 
 
¶19.  This cable was cleared/coordinated with Embassy Brasilia. 
 
McMullen