VZCZCXRO3511
PP RUEHRG
DE RUEHBR #1036/01 1511738
ZNY CCCCC ZZH
P 311738Z MAY 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 5499
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHRG/AMCONSUL RECIFE 4843
RUEHSO/AMCONSUL SAO PAULO 7043
RUEHRI/AMCONSUL RIO DE JANEIRO 2148
RUEHBU/AMEMBASSY BUENOS AIRES 4035
RUEHSG/AMEMBASSY SANTIAGO 5527
RUEHAC/AMEMBASSY ASUNCION 5450
RUEHMN/AMEMBASSY MONTEVIDEO 6265
RUEHME/AMEMBASSY MEXICO 1977
RUEHCV/AMEMBASSY CARACAS 3260
RUEHBO/AMEMBASSY BOGOTA 3761
RUEHQT/AMEMBASSY QUITO 1833
RUEHLP/AMEMBASSY LA PAZ 4604
RUEHPE/AMEMBASSY LIMA 3004
RUEHC/USDOC WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 001036 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE, DDOUGLASS 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
STATE PASS USAID FOR LAC 
 
E.O. DECL:05/25/2016 
TAGS: EFIN EPET EINV PGOV PREL BR BL
SUBJECT: BRAZIL - A/S SHANNON MEETING WITH FINANCE MINISTER 
MANTEGA 
 
REF: A) BRASILIA 1008 
 
      B) BRASILIA 0961 
      C) BRASILIA 0888 and previous 
 
Classified by Charge d'Affaires Phillip T. Chicola, reasons 1.4 
(b) and (d). 
 
¶1. (C) Summary:  In a wide-ranging May 22 meeting, 
recently-appointed Finance Minister Guido Mantega told A/S 
Shannon and the Charge that Brazil's economy was "sound" and in 
good shape to weather the current volatility on world financial 
markets.  Mantega and his International Secretary, Luiz Pereira, 
credited Brazil's decreased vulnerability to continuing high 
trade and current account surpluses, which have enabled it to 
pay down external debt and accumulate substantial reserves. 
Mantega reaffirmed the GoB's commitment to sound fiscal policy 
and to meeting its 4.25% of GDP primary surplus target.  He said 
the GoB understood the importance of further social security 
system reforms to bring under control the system's burgeoning 
deficit, but noted that Lula would not publicly address this 
politically-sensitive reform prior to the October presidential 
elections.  Turning to regional issues, Mantega affirmed that 
Bolivian gas would keep flowing, that there would be a 
negotiated price increase and that Petrobras energetically would 
defend its commercial interests in all appropriate fora. 
Shannon emphasized the importance of Brazil's 
institution-building and regional integration efforts in light 
of the wave of populism in the region.  End Summary. 
 
¶2. (SBU) In a May 22 meeting, recently-appointed Finance 
Minister Guido Mantega told visiting WHA A/S Tom Shannon that 
the Brazilian economy is doing well, and that the GoB has its 
fiscal accounts under control and is committed to meeting the 
4.25% of GDP primary surplus target.  Revenues were up, 
primarily due to the strong profitability of certain economic 
sectors (mining, banking, oil), rather than tax rate increases, 
the FinMin affirmed.  Mantega boasted that the Lula 
administration has run bigger primary surpluses than its PSDB 
(opposition party) predecessor, a commitment that has helped the 
GoB reduce its net-debt-to-GDP ratio. (Comment: Mantega, who in 
his previous jobs criticized the Finance Ministry's fiscal 
orthodoxy, in particular its over-performance of the primary 
surplus target, delivered the fiscal talking points without 
irony.  End Comment.)  Contrasting the current situation with 
that when the Lula Administration took office, Mantega affirmed 
that no one questions the GoB's ability to service its debts. 
Indeed, the GoB had pre-paid its debt to the IMF and the Paris 
Club and had re-purchased its Brady Bonds. 
 
Market Volatility 
----------------- 
 
¶3. (SBU) Mantega told Shannon that the GoB's strong external 
accounts have reduced substantially its vulnerability to a 
financial crisis.  In the waiting room prior to the meeting, 
International Secretary Pereira noted to Shannon that the 
uncertainty in international financial markets over the course 
of the Federal Reserve's future interest rate decisions drove 
the nearly 4% depreciation of the Real against the dollar on May 
¶22.  (Note: this was followed by an almost 5% depreciation on 
May 24 and then a sharp rebound on May 25.)   Pereira stated 
that Brazil was well-prepared for a period of market volatility, 
with continuing strong trade and current account surpluses 
driving a marked improvement in the country's external position. 
 Both the GoB and private sector have reduced external debt. 
The GoB, moreover, has built up a large stock of international 
reserves (US$63.5 billion as of May 12), which was now almost 
equal to its net external debt and well in excess of short term 
 
BRASILIA 00001036  002 OF 003 
 
 
debt.  Pereira expected that the markets would find a new 
equilibrium once the Fed's intentions became clear. 
 
Defending the Administration's Economic Record 
--------------------------------------------- - 
 
¶4. (SBU) While average economic growth under the Lula 
Administration has been between 3% and 3.5%, Mantega affirmed 
that Brazil's economy could grow as much as 5% this year. 
Growth was improved, moreover, over the 2% to 2.5% average of 
the previous decade.  "Brazil is not China," he stated, and 
cannot grow at rates upwards of 7% because it already reaped the 
large productivity gains that come from industrialization and 
the move from a primarily agricultural to an industrialized 
economy in the 1960's and 1970's.  Brazil is democratic, and the 
government cannot impose reforms, although the GoB patiently has 
been strengthening economic institutions, such as the 
independent regulatory agencies.  During Lula's term, Mantega 
stated, industry had grown strongly and employment was up 
significantly, as were wages and per capita income.  The 
food-processing industry in particular was creating substantial 
numbers of new jobs, primarily in small and medium-size cities. 
 
¶5. (SBU) Turning to the reform agenda, Mantega catalogued a 
series of reforms the GoB has undertaken or hopes to undertake, 
without clarifying which he considered priorities.  "I've never 
seen a government undertake so many reforms," he boasted. 
Mantega stated that the GoB understands there is a need to 
reform the social security system, which is running increasing 
deficits (septel), but it was not the time publicly to discuss 
the sensitive issue, given the October presidential elections. 
In addition, awaiting congressional action are bills to unify 
the state-level value added taxes (ICMS), a bill to cut red tape 
for small and micro-enterprises, and a new competition law.  The 
GoB already has undertaken targeted measures to reduce taxes on 
certain sectors and would like to simplify the bureaucratic 
requirements for imports, Mantega stated.  The GoB also plans 
labor union reform and other (unspecified) reforms that it could 
not publicize during an election year, according to Mantega. 
Pereira added the GoB has undertaken measures to reduce the cost 
of capital and plans to take additional such steps in the 
future. 
 
Trade and Regional Integration, Institution-building 
--------------------------------------------- ------- 
 
¶6. (SBU) Although still relatively small as a percentage of GDP, 
Brazilian trade is growing quickly as the country inserts itself 
into the global economy, Mantega stated.  Exports have been very 
strong, driving current account surpluses that have kept the 
exchange rate at appreciated levels.  The country needs to 
increase imports, Mantega affirmed.  Pereira noted that the GoB 
has focused on facilitating infrastructure development to 
underpin regional integration, such as a new bridge on the 
border with Peru and the paving of a trans-Andean highway in 
that country that together would create physical links to 
Brazil.  These efforts have included financing from the National 
Development Bank (BNDES -- over which Mantega used to preside). 
The GoB also aims to reduce the asymmetries among the large and 
small Mercosul members and would like to strengthen its 
institutions.  As part of this effort, the Finance Ministry 
leads GoB participation in the Mercosul macroeconomic 
convergence dialogue, Pereira said.  Shannon applauded the GoB's 
focus on institutional strengthening and regional integration, 
particularly given the role that weak institutions have played 
in facilitating the current wave of populism in the region. 
 
Bolivia: Reality Comes Knocking 
 
BRASILIA 00001036  003 OF 003 
 
 
------------------------------- 
 
¶7. (C) Bolivian President Morales was starting to come up 
against reality and likely would walk back some of his wilder 
pronouncements, Mantega stated.  Bolivian gas would keep 
flowing, Mantega affirmed, although he acknowledged that the 
price Brazil paid (currently US$3 per 1000 BTU) needed to 
increase to better track oil and gas prices on world markets. 
Betraying irritation, Mantega argued that Morales should have 
made use of the existing contractual mechanisms to pursue price 
negotiations, rather than sending in troops to occupy Petrobras 
facilities. 
 
¶8. (C) Bolivia, Mantega argued, is much more reliant on Brazil 
than vice versa.  Brazil will develop additional domestic gas 
sources capable of producing gas volumes equivalent to those it 
currently receives from Boliva, according to Mantega. 
Petrobras, moreover, is even less reliant on Bolivia, which 
accounts for only about two percent of its investments 
world-wide.  The GoB also had agreed to put consideration of IDB 
debt forgiveness on hold for the time being, according to 
Mantega.  At the political level, however, President Lula would 
not take a strident line, Mantega stated, but rather take the 
same tone a parent would take when firmly disciplining an errant 
child.  Nevertheless, Petrobras, Mantega declared, would defend 
its commercial interests in all appropriate fora. 
 
¶9. (C) Comment:  Mantega clearly is still settling into the job 
and becoming familiar with the subject matter.  He put on a 
credible show, however, and was careful to avoid stepping on the 
Central Bank's toes, referring only briefly to monetary policy 
and limiting his comment to noting that the current situation 
was "satisfactory."  At times he was clearly enjoying himself, 
joking, i.e., "as my right arm is in a sling, the fact that I 
shake hands with my left hand doesn't mean I am a leftist." 
Most welcome was Mantega's acknowledgement of the need for 
reform to stanch the budgetary bleeding in Brazil's social 
security system.  That effort needs to succeed, as the 
burgeoning social security deficit, combined with constitutional 
earmarks and growing obligatory expenditures, will leave the 
next administration with little ability to make critical 
investments. 
 
¶10. (U) This cable was cleared by A/S Shannon. 
 
CHICOLA