VZCZCXRO6112
PP RUEHRG
DE RUEHBR #1630/01 2211902
ZNR UUUUU ZZH
P 091902Z AUG 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6298
INFO RUEHRG/AMCONSUL RECIFE 5244
RUEHSO/AMCONSUL SAO PAULO 7686
RUEHRI/AMCONSUL RIO DE JANEIRO 2625
RUEHSG/AMEMBASSY SANTIAGO 5669
RUEHBU/AMEMBASSY BUENOS AIRES 4182
RUEHAC/AMEMBASSY ASUNCION 5577
RUEHMN/AMEMBASSY MONTEVIDEO 6390
RUEHQT/AMEMBASSY QUITO 1925
RUEHPE/AMEMBASSY LIMA 3114
RUEHLP/AMEMBASSY LA PAZ 4763
RUEHCV/AMEMBASSY CARACAS 3378
RUEHBO/AMEMBASSY BOGOTA 3874
RUEHME/AMEMBASSY MEXICO 2017
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001630 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR FEARS 
TREASURY FOR OASIA - DAS LEE, D.DOUGLASS 
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. 12958: N/A 
TAGS: ECON PGOV PREL EFIN EINV BR
SUBJECT: BRAZIL: ECONOMY HELPING LULA'S REELECTION BID 
 
REF: A) Brasilia 1151 
 
     B) Brasilia 902 
 C) Brasilia 790 
 D) Brasilia 608 
 E) Sao Paulo 643 
 
This cable is sensitive but unclassified, please protect 
accordingly. 
 
¶1. (SBU) Summary:  Economic factors are boosting President Lula's 
chances of winning reelection in October 2006.  Solid expected GDP 
growth of about 4% this year combined with higher salaries, lower 
unemployment and inflation under control, mean that the economic 
"feel-good" factor going into the elections favors Lula.  Lula also 
has bolstered his position through increases in the minimum wage 
(which also feed through to pension benefits for the poorest) and 
spending on GOB social programs.  These have had their biggest 
impacts on the pocketbooks of social strata that identify strongly 
with Lula.  While the race is by no means over, opposition Social 
Democrat (PSDB) candidate Alckmin faces a tough slog to overcome 
these advantages.  The potential conflict between Lula's increased 
spending (refs A and C) and the need for continued fiscal restraint 
will remain to be dealt with regardless of who wins.  End Summary. 
 
Credit, Employment, Wages and Consumption All Growing 
--------------------------------------------- -------- 
 
¶2. (SBU) A confluence of economic events, some influenced by the 
Lula Administration and others fortuitous, appear to be enhancing 
Lula's reelection bid.  Among the points of good fortune is the 
favorable timing of the economy's business cycle.  Having vanquished 
stubborn inflationary pressures last year, the Central Bank has 
reduced interest rates at each of its monetary policy meetings since 
September 2005, bringing the overnight benchmark rate (SELIC) down 
from 19.75% to 14.75%, the lowest nominal rate in a decade.  With 
Central Bank survey data showing inflation expectations for the next 
twelve months running at about 4.4% -- combined with a strong 
balance of payments position -- there remains room for the Central 
Bank to continue reducing rates.  This is having a clear effect on 
consumer lending.  Overall credit over the twelve months through 
June 2006 has grown 22.7%, but credit to individuals grew more 
quickly, by 29.7%.  Within the latter category, personal loans were 
up 31.8% and loans for vehicle purchases were up 34.2%.  The average 
interest rate on such loans is down 5.5 percentage points over the 
same time period.  The only cloud on the credit horizon is that 
default rates on personal loans also are up. 
 
¶3. (U) Employment and wages have proven to be bright spots for Lula. 
 The Brazilian economy has created over a quarter of a million new 
jobs in the first five months of 2006.  The average official 
unemployment rate in that period was 10.1%, down from 10.6% at 
end-2005.  Just as crucially, average wages were up 7.7% from May 
2005 to May 2006 while total wages paid climbed 8.6% over the same 
period.  This combination of higher wages, lower interest rates and 
credit growth has helped boost consumer spending.  Retail sales in 
the first five months of 2006 were up 6% over the same period of 
¶2005.  Growth in the sales of furniture and household 
appliances/electronics was particularly strong.  Taken together, the 
above factors have contributed strongly to the improved expectations 
for GDP growth this year, which should border on 4%, up from a 
lackadaisical performance of 2.3% in 2005. 
 
Increased Minimum Wage, Pensions and Cash Transfers 
--------------------------------------------- ------ 
 
¶4. (SBU) While some of the positive economic trends have been 
fortuitous, Lula is helping himself with some financial engineering 
as well.  As noted in ref A, Lula has increased the minimum wage by 
 
BRASILIA 00001630  002 OF 002 
 
 
13% in real terms since 2004.  This also increased the minimum 
social security pension, which is constitutionally linked to the 
minimum wage.  The social security system, which is also used as a 
wealth transfer mechanism, effectively has increased the real 
incomes of poor pensioners.  Separately, Lula has been working to 
expand the reach of his flagship conditional cash transfer program, 
Bolsa Familia.  Raul Velloso, a fiscal expert with ties to the 
opposition PSDB party, estimated to Econoff that through these three 
prongs (minimum wage, minimum pension and Bolsa Familia) Lula had 
been able to increase the real incomes of about 21 million families, 
or about 60 million people.  This socio-economic group, he added, 
identifies strongly with Lula and his compelling "rags-to-President" 
Horatio Alger story. 
 
¶5. (SBU) Ref E discusses in detail the increased spending power of 
the lower-middle/working class and their increased role in the 
Brazilian economy.  In a related point, some analysts argue that the 
growth in personal loans and credit, often extended by retailers for 
purchases such as appliances, has benefited working class borrowers 
in particular.  With increased access to credit these working class 
and lower-income consumers have begun to spend more on items such as 
electronics.  While the lines between the upper middle class and 
lower middle class/working class are devilish to define, many 
political analysts and poll-watchers have pointed to these voters as 
the key election battleground which Alckmin must win in order to be 
elected. 
 
May Emerging Market Financial Turbulence Barely a Blip 
--------------------------------------------- --------- 
 
¶6. (SBU) The Lula Administration's pursuit of responsible 
macroeconomic policies helped Brazil dodge a bullet in May and early 
June 2006, when emerging markets were hit by the most serious bout 
of financial market turbulence since mid-2003.  Aided by successive 
strong current account surpluses and strong capital inflows, the GoB 
has used the time since 2003 to pay down external debt (ref B), 
reduce to zero its net exposure to foreign-exchange linked domestic 
debt, increase international reserves and further reinforce the 
credibility of its institutional framework.  Brazil's solid economic 
fundamentals meant that the financial market turbulence left the 
real economy largely unruffled and kept the economy from becoming a 
negative campaign issue for Lula. 
 
¶7. (SBU) Comment:  In contrast to the constant attrition Lula has 
faced with corruption scandal after corruption scandal wearing down 
his image, Lula has helped himself on the economic front.  His 
embrace of responsible macroeconomic policies has given him his 
biggest advantage, a sound economy heading into the elections.  His 
spending on social programs and minimum wage increases have helped 
poorer Brazilians feel a bit more affluent.  The potential conflict 
between Lula's increased spending (refs A and C) and the need for 
continued fiscal restraint will remain to be dealt with regardless 
of who wins. 
 
SOBEL