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UNCLAS SECTION 01 OF 09 SAO PAULO 000880 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR SCRONIN 
STATE PASS USTR FOR SULLIVAN/LEZNY 
DEPT OF TREASURY FOR DDOUGLASS 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC ALSO FOR 3134/USFCS/OIO/EOLSON/DANDERSON 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DOL FOR ILAB PEREZ-PKOPEZ AND WHOLEY 
 
E.O. 12958: N/A 
TAGS: ECON ELAB ETRD EFIN EIND BR
SUBJECT: Brazil: Domestic Demand Boosts Industry in First Half of 2006 
 
 
SAO PAULO 00000880  001.5 OF 009 
 
 
¶1.  SUMMARY:  Official data for the first half of 2006 suggest it 
should be a relatively good year for Brazil's economy, although 
less so than 2004.  Slower global growth and the strong domestic 
currency (the Real) are, according to analysts, beginning to slow 
the growth of certain Brazilian exports.  Inflation and 
unemployment are expected to drop steadily throughout the year. 
Falling interest rates and wage increases are boosting domestic 
demand.  The auto industry set new records in production and 
exports in the first five months of 2006, but the appreciated 
Real has reduced the profitability of exports, reducing planned 
export levels and contributing to layoffs by some auto 
manufacturers.  The trade surplus narrowed as export growth 
slowed and import growth accelerated.  In national accounts, 
investment inflows in the second quarter were lower than expected 
due to turbulence in international financial markets.  The 
current account has been pressured by higher-than-expected 
remittances of profits and dividends, in addition to higher 
outflow for interest payments on external debt.  End Summary. 
 
SAO PAULO POSTED THE SECOND LOWEST INFLATION RATE OF SERIES 
 
¶2. The Institute of Economic Research (FIPE) of the University of 
Sao Paulo reported that consumer price inflation in Sao Paulo was 
0.64 percent in the first four months of 2006, the second lowest 
inflation rate it has ever recorded.  Total inflation over a 12- 
month period through April 2006 was 2.57 percent, the lowest rate 
registered since the introduction of the Central Bank's 
inflation-targeting monetary policy regime in 1999.  FIPE said 
that the pressure on the inflation index from inter-harvest 
ethanol fuel price increases has eased, making ethanol fuel 
consumption attractive again.  FIPE noted that natural gas 
prices, even were they to climb 50 percent, will not weigh 
substantially in the inflation index, though it would be felt by 
the consumer.  Inflation in the month of April rose only 0.1 
percent. 
 
¶3. According to FIPE Research Coordinator Paulo Picchetti, a firm 
adherence to inflation targeting and a strong exchange rate have 
curtailed price pressures.  With inflation largely under control, 
FIPE revised downward, to 4 percent, its 2006 inflation rate to 
remain at 4 percent in 2007.  In May, the FIPE index posted 
deflation of 0.22 percent, the largest decline since February 
¶2000.  Ethanol fuel prices declined for the second consecutive 
month, easing pressure on the index from January.  Food prices, 
too, fell 0.89 percent for the 12th consecutive month.  FIPE said 
that the devaluation of the dollar and the need to pay debts has 
led farmers to sell more produce domestically at bargain prices. 
The highest declines were registered in the price of rice, down 
4.57 percent; oranges, down 10.66 percent; and beans, down 6.68 
percent.  FIPE also reported that the market basket price fell 
1.05 percent in May.  Cumulative inflation in the first five 
months of the year was 0.41 percent, and 1.97 percent in 12 
months through May. 
 
 
                             TABLE I 
Monthly Consumer Price Inflation (CPI) in 2006: ? Sao Paulo 
 
Year 2006             January   February   March   April    May 
---------             -------   --------   -----   -----    --- 
 
(Percent change)       0.50     (0.03)      0.14    0.01  (0.22) 
 
Source: FIPE 
Consumer Price Inflation ? Sao Paulo 
(Percent Change from April to May 2006) 
Source: FIPE 
 
 
----- 
Month                                April        May 
-----                                -----        --- 
 
SAO PAULO 00000880  002.2 OF 009 
 
 
Transportation                       (0.04)     (0.61) 
Food Products                        (0.64)     (0.89) 
Rent                                 (0.05)     (0.01) 
Personal Care Services                0.26       0.02 
Clothing                              1.01       0.39 
Tuition Fees                          0.13       0.10 
Health Care                           1.26       0.80 
Source: FIPE 
 
NATIONWIDE INFLATION AT ITS MILDEST PACE IN MANY YEARS 
 
¶4.  The Brazilian National Statistical Agency (IBGE) reported 
that the inflation in consumer prices nationwide, as measured by 
the National Broad Consumer Price Index (IPCA), slowed to 0.10 
percent in May from 0.21 percent in April, driving the 12-month 
inflation rate down to a 7-year low of 4.23 percent, which is 
below the 4.5 percent target set by the Brazilian Central Bank 
for 2006.  IBGE noted that inflation was 0.49 for May 2005.  The 
decline of inflation in May was due primarily to an 11 percent 
drop in ethanol fuel prices, which had been rising for months, as 
well as to mild increases for medicine, clothing, electricity and 
condominium fees.  Overall, food prices declined slightly in May 
compared to the previous month.  Chicken and beef were the only 
food products that posted an increase due to the resumption of 
exports.  IBGE revised downward to 4.5 percent its IPCA inflation 
forecast for 2006, which is within the GOB inflation targeting 
range introduced in 1999.  A Sao Paulo economist reported that a 
bumper agriculture crop and the positive impact of the exchange 
rate are sustaining lower inflation levels. 
 
¶5.  Background note: The IPCA serves as the primary benchmark for 
the GOB's inflation-targeting monetary policy. It records the 
average of daily price variations in eleven major cities (Sao 
Paulo, Rio de Janeiro, Porto Alegre, Belo Horizonte, Recife, 
Belem, Fortaleza, Salvador, Curitiba, Brasilia, and Goiania). The 
IPCA statistical sample includes families with incomes between 
one and forty times the monthly minimum wage (i.e., up to 
approximately USD 6,086 in May 2006). 
 
SAO PAULO INDUSTRIAL PRODUCTION UP IN THE FIRST QUARTER 
 
¶6.  The Sao Paulo Industrial Activity Index (INA), maintained by 
the Federation of Industries of the State of Sao Paulo (FIESP), 
rose 8.6 percent in the first quarter compared to the same 
quarter of 2005.  Industrial activity in March rose 1.1 percent 
versus March of 2005.  FIESP Economic Department Director Paulo 
Francini said that industrial output has surpassed all 
projections.  He credited increased exports for the industrial 
output expansion and noted that vehicle, metalworking, and pulp 
and cardboard sectors were operating at 90 percent, 88.7 percent, 
and 91.4 percent of installed capacity, respectively.  Real 
industrial sales in the first quarter climbed 22.6 percent 
compared to the same quarter of 2005, and hours worked rose 8.1 
percent.   According to FIESP, Sao Paulo state industry operated 
at an average 81.8 percent capacity in the first quarter of this 
year.  FIESP predicted that current output capacity will be 
exhausted in the next two to three years if industry output grows 
at an average of 3.5 to 4 percent a year without new investment 
to support the expansion. 
 
¶7.  In April, by contrast, the Industrial Activity Index (INA), 
declined 1.4 percent from March but rose 4.8 percent in 
comparison to April 2005.  In the opening four months of 2006, 
industrial production grew 7.6 percent.  Overall, industrial 
capacity utilization was 79.8 percent in April.  Real sales rose 
20.9 percent in the four months under review and were up 16.2 
percent when comparing April 2006 to April 2005; however, 
compared to March, real sales were down 10.3 percent.  Hours 
worked in production in April fell 3 percent versus March but 
were up compared to a year ago.  FIESP's Francini reinforced the 
view that the industrial sector will continue moving forward in 
the months ahead, notwithstanding still high interest rates.  A 
 
SAO PAULO 00000880  003.2 OF 009 
 
 
private sector business representative in Sao Paulo told us that 
the prospects for investment this year remain worrisome, given 
the lagging impact of high interest rates and the effect of 
current political uncertainties on business confidence.  In fact, 
he noted that surveys already show a significant reduction in 
investment intentions in the steel, auto, and energy sectors. 
Other sources report that Sao Paulo industry output is losing 
steam and is not expected to grow more than 2 percent in the 
first half of this year compared to the first half of 2005. 
According to this source, paper and cardboard production will 
grow 3.3 percent, machines and equipment 1.4 percent, and 
electronic products 15 percent. 
 
                      TABLE II 
SELECTED FIESP DATA FOR THE FIRST QUARTER OF 2006 
 
¶A. Industrial activity, hours worked and sales: Percentage 
changes from previous year (data not seasonally adjusted): 
 
                                    Jan-March 2006 
                                    Jan-March 2005 
                                    - - - - - - - 
Industrial Activity Level (1)            8.6 
Hours worked in production               8.1 
Real median salaries                     9.0 
Real Sales                              22.6 
Use of installed capacity               81.8 
 
 
-- The activity level indicator (INA) is a composite of activity 
indicators including real sales, employment, hours worked in 
production, salaries, and capacity utilization.  The INA index 
does not measure industrial production per se. 
 
SAO PAULO RETAIL SALES ROSE IN THE FIRST QUARTER 
 
¶8.  Retail sales in Sao Paulo in the first quarter of 2006 
compared to the same quarter a year ago were up 2.4 percent, 
according to data released by the Federation of Commerce of the 
State of Sao Paulo (FCESP).  March retail sales fell 2 percent 
from the same month of 2005, interrupting a series of eight 
consecutive months of growth in similar comparison.  March 2006 
compared to March 2005 showed the following positive results: 
clothing, textiles and footwear were up 7.7 percent; toiletries, 
up 7.2 percent; and auto parts, up 2.4 percent.  Negative 
performance was registered by household appliances and electronic 
products, down 19.7 percent; furniture, down 3.7 percent; and 
supermarkets sales, down 2.9 percent. 
 
NATIONWIDE INDUSTRIAL OUTPUT UP IN THE FIRST QUARTER OF 2006 
 
  ¶9.  According to IBGE, Brazilian industrial output nationwide 
grew 4.6 percent in the first quarter of 2006 compared to the 
same quarter of previous year, and was up 1.2 percent versus the 
immediately previous quarter, confirming the recovery begun in 
¶2005.  The growth of 4.6 percent in the first quarter in relation 
to the same quarter of 2005 was driven by 19 of the 27 industrial 
sectors.  Mining, up 13.2, percent showed the biggest impact on 
the overall index, propelled principally by the production of 
iron ore and petroleum.  Other relevant contributions came from 
machines and information technology (IT) equipment, up 67.4 
percent, reflecting a higher production of computers; and 
electronics and communications equipment, up 21.7 percent, due to 
higher production of TV sets and cellular telephones.  Activities 
with significant growth were electric machines and equipment, up 
18.4 percent; pharmaceuticals, up 12.2 percent; tobacco, up 20.4 
percent; and beverages, up 10.6 percent.  On the other hand, the 
eight sectors that posted declines were wood, down 7.1 percent, 
and basic metallurgy, down 1.6 percent.  The first quarter 
results also showed accelerated increase in durable consumer 
goods, which increased 14.9 percent, and capital goods, up 9.2 
percent.  Besides the 12.6 percent increase of auto production, 
 
SAO PAULO 00000880  004.3 OF 009 
 
 
cellular telephones production also expanded 31.3 percent, and 
household appliances 13.9 percent. 
 
  ¶10.  In the capital goods sector, capital equipment production 
for the energy sector rose 45.2 percent; capital equipment 
production for construction expanded 21.4 percent; and capital 
goods for mixed use were up 17.3 percent. The main negative 
performance was of capital goods for the agricultural sector, 
down 17.5 percent.  In the same comparison, production of semi- 
durable and non-durable consumer goods increased 4 percent, 
remaining slightly below the 4.6 percent rate for the overall 
industry.  The major impact came from food products and 
beverages, up 5.3 percent, followed by other non-durables, up 3.8 
percent, stimulated by higher production of magazines and 
medicines.  It is worthwhile to note that fuels led by gasoline 
increased 7.5 percent.  On the other hand, negative pressure came 
from semi-durables, down 1.8 percent, highlighted by leather 
shoes and clothing, excluding cotton garments.  Intermediate 
goods expanded moderately, up 2.8 percent, pushed by the 
production of industrial inputs, which climbed 16.7 percent, and 
fuels and lubricants, up 13.9 percent, well above the average, 
due to the good performance of iron and petroleum.  The only 
negative pressure came from industrialized foods and beverages, 
down 5.9 percent, due to a drop in production of sugarcane by- 
products.  The production of packaging materials grew 1 percent 
in the quarter under review, while construction materials rose 
6.9 percent.  In summary, the evolution of indices in the first 
quarter of 2006 showed a positive scenario for Brazil's 
industrial performance. 
 
 
¶11.  Industrial production remained stable in April from the 
previous month after declining slightly in March.  Compared to 
April of 2005, industrial output fell 1.9 percent; however, 
accumulated expansion was 2.9 percent in the first four months of 
2006 versus the same period of 2005.  Over a 12-month period 
including April, cumulative growth was 6.2 percent.  Of the 27 
industrial sectors surveyed in April by IBGE, 19 posted expansion 
compared to March, and 8 registered decreases.  The outstanding 
performance was that of business machines and informatics 
equipment, up 52.2 percent, and petroleum refining and ethanol 
fuel production, up 8.3 percent.  On the negative side, the 
largest pressures were from the pharmaceutical sector, down 11.4 
percent, food products, down 6.9 percent and autos, down 6.2 
percent.  A business contact told us that industrial performance 
in the months ahead is one of gradual increase. 
 
       ¶12.  Industrial production increased in March in 12 of the 14 
principal Brazilian regions compared to March of 2005.  Para 
state outperformed the national average, clocking 17.5 percent 
growth.  Other states with growth include Ceara, up 12.3 percent; 
Amazonas, up 8.5 percent; Minas Gerais, up 7.3 percent; Sao 
Paulo, up 6.4 percent; Bahia, up 5.9 percent; Northeast Region, 
up 4.6 percent, Pernambuco, up 3.9 percent; Espirito Santo, up 2 
percent, Santa Catarina, up 1.7 percent; Rio de Janeiro, up 1.3 
percent and Goias, up 0.1 percent.  Meanwhile, industrial 
production fell in Rio Grande do Sul, down 1 percent; and in 
Parana, down 3.2 percent. 
 
       ¶13.  Overall, according to IBGE data released in the third week 
of June, of the 14 areas surveyed, production remained stable in 
April versus April 2005.  Of 14 regions surveyed, 6 posted 
growth, 6 registered declines and two showed no loss or gain. 
Once more, Para topped the list with exceptional growth of 10.2 
percent; Pernambuco was up 8.6 percent; Bahia, 5.2 percent; 
Espirito Santo, 1.3 percent; Minas Gerais, 1.2 percent, and the 
Northeast Region, 1.2 percent.  Negative performance was reported 
in Santa Catarina, down 10.2 percent; Amazonas, down 9 percent; 
Rio Grande do Sul, down 8.9 percent, Parana, down 6.3 percent; 
Goias, down 4.9 percent and Sao Paulo, down 1.2 percent.  IBGE 
said that two fewer working days in April were responsible for 
the meager performance.  Cumulative performance in the first four 
 
SAO PAULO 00000880  005.4 OF 009 
 
 
months of 2006 compared to the same period of 2005 showed that 
the state of Para, which led with a growth of 12 percent, was 
sustained by the extraction of iron ore. 
 
NATIONWIDE RETAIL SALES BETTER THAN EXPECTED IN APRIL 
 
¶14.  According to IBGE, April retail sales posted an increase of 
1.43 percent and the year-on-year growth rate increased 7.42 
percent, consolidating reports of growth based on greater 
domestic demand.  Growth in the last twelve months including 
April was 5.05 percent compared to the same period a year ago. 
Six of the eight sectors surveyed by IBGE sold more in April than 
in March of this year. Lower lending rates, higher family income 
and increased credit facilities boosted consumer spending.  The 
outstanding performances were supermarket sales of food, 
beverages, cigarettes, communications material and equipment, 
computers and office equipment.  Also, clothing sales helped the 
recovery as winter sales gained steam in April.  Durable goods 
had a strong performance boosted by world cup related sales of TV 
sets and DVD players.  The fuels and lubricants sector was among 
the few that posted a negative performance during the period. 
Cumulative increase of retail sales in the first four months of 
this year amounted to 5.64 percent, outstripping last year's 4.84 
percent increase during the same period.  IBGE believes that 
retail trade has also benefited from declining interest rates, 
higher minimum wages, better employment conditions and higher 
fiscal spending. 
 
SAO PAULO INDUSTRIAL EMPLOYMENT UP IN MAY 
 
¶15.  A survey by the Federation of Industries of the State of Sao 
Paulo (FIESP) showed a 0.7 percent increase in Sao Paulo 
industrial employment in May for a gain 15,000 jobs.  Compared to 
May of 2005, Sao Paulo industry generated 75,000 more jobs. 
Despite a slower increase in the number of jobs generated in the 
first five months of 2006, FIESP maintained its earlier 
projections of a 4 percent increase of new jobs in 2006.  FIESP'S 
Economic Research Department Director, Paulo Francini, said that 
the 0.70 percent hike in industrial employment was positive, 
though modest given the 1.92 percent increase of April.  He noted 
that compared to May of 2005 the increase is already 3.6 percent 
and that it would not be difficult to reach 4 percent growth this 
year.  Francini emphasized that conditions for increased 
consumption are in place, supported by income expansion, 
continued growth of credit facilities, a higher minimum salary, 
increasing public expenditure and more public investments.  He 
also reinforced the view that consumption can increase in some 
sectors but without a corresponding increase in domestic 
production.  "We can see this clearly in the footwear sector with 
growing demand sustained by imports.  In a nutshell, demand grows 
and local production declines".  In the survey of the 21 
industrial associations consulted by FIESP, 7 fired workers, 11 
hired workers and two reported no net gain or loss.  The largest 
number of dismissals occurred in the office equipment, furniture, 
leather tanning and footwear industries.  Most of the added 
workers were in the ethanol fuel, food and beverages, transport 
then equipment, coke, and petroleum refining industries. 
 
COUNTRYWIDE INDUSTRIAL EMPLOYMENT UP IN APRIL 
 
¶16.  According to IBGE data, nationwide industrial employment was 
up 0.6 percent in April compared to March, but fell 0.8 percent 
compared to April of 2005.  IBGE pointed out this is the eighth 
consecutive negative result. Cumulative industrial employment in 
the first four months of this year also was down 0.8 percent. 
Industrial employment countrywide fell in April in 8 of 14 areas 
surveyed compared to April of 2005. The state of Rio Grande do 
Sul, down 9.3 percent, was the most affected due to cutback of 
footwear and leather goods output, as well as the Northeast 
Region.  Over 12 months to April, industrial employment 
nationwide fell 0.1 percent.  Wages fell 0.7 percent in April 
versus the previous month.  This is the second consecutive month 
 
SAO PAULO 00000880  006.2 OF 009 
 
 
of drop in wage levels accumulating a contraction of 2.7 percent. 
Confronting other indicators, workers' wages were up 2.2 percent 
in the first four months of this year versus the same period of 
2005, and up 2.2 percent in 12 months to April. 
 
UNEMPLOYMENT STABLE IN GREATER SAO PAULO IN APRIL 
 
¶17.  The total unemployment rate in the greater Sao Paulo area, 
calculated jointly by the Sao Paulo State Statistical Institute 
(SEADE) and the Labor Union-Funded Statistical and Research 
Center (DIEESE), remained stable at 16.9 percent compared to 
March.  The Sao Paulo metropolitan area had over 1,700,000 
workers looking for jobs in April, compared to 1,659,000 workers 
in March.  The number of unemployed fell 5,000 in April, as the 
22,000 new jobs created were not sufficient to absorb 27,000 
workers who entered the labor market.  (Note:  The SEADE/DIEESE 
index includes underemployed and discouraged workers and is 
therefore higher than the open market rate measured by IBGE. 
IBGE figures showed the unemployment rate for greater Sao Paulo 
as 10.4 percent in April, the same rate as in March.  End Note). 
The SEADE/DIEESE data showed that the unemployment rate in the 
metropolitan area of Sao Paulo has remained stable this year. 
 
¶18.  Greater Sao Paulo's economically active population in 
December was estimated at 10,058,000 persons, up slightly from 
10,031,000 persons in March and 10,100,000 in February. 
Meanwhile, the number of persons employed in April was 8,358,000, 
up 0.3 percent from March.  Of those persons employed in April, 
1.62 million were industrial workers; 1.28 million worked in 
commerce/retail; 4.49 million were in the services sector; and 
953,000 worked in other sectors including construction and 
household services. 
 
¶19. The SEADE/DIEESE workforce statistics reflected the following 
performance by various sectors in April compared to March. 
 
Job Generation/Loss by Sector            April/06 thru 
(Reported in thousands)                  March/06 
- - - - - - - - - - - - - - - 
Industry                                   -13 
Services                                    37 
Civil construction/household help          -05 
Commerce Retail                             03 
(Source: SEADE/DIEESE) 
 
 
(Note: The SEADE/DIEESE survey results differ from FIESP's 
because SEADE/DIEESE limits its survey to the metropolitan area 
of Sao Paulo; is conducted among 3,600 assorted households, 
including self-employed and unregistered workers; and surveys 
different households each month.  FIESP's survey covers the state 
of Sao Paulo; is limited to a fixed number of large industrial 
firms, which are surveyed every month; and excludes self-employed 
and unregistered workers. End Note). 
 
NATIONALY UNEMPLOYMENT WAS STABLE IN APRIL AND MAY 
 
¶20.  According to a monthly survey carried out countrywide by 
IBGE in the six largest metropolitan regions (Sao Paulo, Rio de 
Janeiro, Porto Alegre, Belo Horizonte, Salvador and Recife), the 
overall unemployment rate for these regions was estimated at 10.4 
percent, and was stable compared to March (10.4 percent).  In 
relation to April 2005, the scenario was also of stability.  By 
areas, comparing April with March of this year, there was no 
significant change in the six areas covered by the survey. 
Compared to April of 2005, two metropolitan regions showed 
changes:  Unemployment in Recife rose from 13 percent to 16.5 
percent, while Salvador fell from 17 percent to 13.4 percent. 
Other regions were was stable.  The average real income of 
workers increased 0.4 percent and 4.7 percent compared to the 
same month of 2005.  Unemployment in the six metropolitan regions 
fell 0.2 percentage points in May of this year compared April. 
 
SAO PAULO 00000880  007.3 OF 009 
 
 
Statistically, this variation does not make much difference, said 
IBGE.  The average real income increased 1.3 percent in May 
compared to April, and 7.7 percent versus May 2005. 
 
BRAZIL'S VEHICLE INDUSTRY SETS RECORD HIGH PRODUCTION AND EXPORTS 
IN THE FIRST FIVE MONTHS OF 2006 
 
¶21. According to the Brazilian Vehicle Manufacturers' Association 
(ANFAVEA), auto manufacturers set new records in terms of 
production and exports in the first five months of this year, up 
6.1 percent and 8.6 percent, respectively, despite complaints 
about the unfavorable exchange rate and the reason why Volkswagen 
and General Motors have announced plans to cut back production 
and fire workers.  ANFAVEA also reported that production and 
exports of vehicles were the highest for a month of May, up 20.1 
percent and 16.7 percent.  This is the all-time high for a month 
of May since the auto industry began operations in Brazil.  All 
the same, ANFAVEA President Rogelio Golfarb said it has been 
difficult for manufacturers to close new export contracts because 
the exchange rate is still volatile.  The sale of agricultural 
machinery, harvesters and implements continued to slide due to 
increasing production costs and heavy farm debt.  He said that 
over the past two years, the Brazilian currency has appreciated 
more than 35 percent against the US dollar.  He also said that 
exports account for nearly 35 percent of overall production. 
Golfarb defended a review of the exchange legislation with the 
possibility for auto companies to use export resources to import 
inputs without the need to bring the foreign currency into the 
country. 
 
¶22.  According to an industry source, exports rose 16.7 percent 
in May, totaling USD 1.06 billion.  In April vehicle exports had 
fallen 9.4 percent to 906,700 units compared to March. 
Cumulative value of export sales of vehicles in the first five 
months of this year amounted to USD 4.6 billion.  Despite the 8.6 
percent growth in the first four months, ANFAVEA maintained 
projections of a 2.7 percent growth in 2006 in return for USD 
11.5 billion.  The same source reported that exports in the first 
five months of 2005 had climbed 40 percent. 
 
¶23.  In May, the auto industry manufactured 245,200 units, up 
20.1 percent compared to April.  Domestic sales totaled 164,100 
units, up 25.1 percent.  In percentage terms, sales of flex-fuel 
cars fell from 77.6 percent of total sales in the first quarter 
but fell in May to 76.3 percent.  ANFAVEA explained that ethanol 
prices were too high recently, so many consumers stopped buying 
flex-fuel cars; however, with more recent ethanol price 
decreases, to about two-thirds the cost of gasoline, demand 
should increase again. 
 
GM AND VOLKSWAGEN ANNOUCE WORK FORCE AND EXPORT CUT DUE TO 
DECLINING RECEIPTS 
¶24.  GM Brazil reported it is cutting approximately 960 jobs, 
almost 10 percent of total work force at its principal car plant, 
due to declining export sales.  GM blamed the Brazilian 
currency's sharp appreciation compared to the US dollar as the 
main reason for the cut in work force.  GM has offered a 
retirement buyout plan to its employees.  GM Vice President 
Pinheiro Neto said that GM exported nearly 210,000 units in 2005 
worth USD 1.6 billion.  This year he expects exports to drop 20 
to 30 percent.  Also, the Brazilian subsidiary of Volkswagen 
announced a plan to gradually cut labor costs by approximately 25 
percent and exports by 40 percent, but that the cut of 25 percent 
in workers' costs would not impose layoffs reaching 25 percent. 
VW said the company may cut back on foreign sales by 100,000 
units until 2008 due to the exchange rate.  Exports account for 
40 percent of VW's output in Brazil.  Trade and Development 
Minister Luiz Fernando Furlan reportedly said that the GOB is 
considering lax law changes as well as ways and means to help the 
auto industry maintain competitiveness in foreign markets. 
According to the Metalworkers' Union in Sao Paulo, VW is planning 
on firing nearly 6,000 workers. 
 
SAO PAULO 00000880  008.4 OF 009 
 
 
 
BRAZIL'S TRADE SURPLUS NARROWED IN THE MONTH OF MAY 
 
¶25.  Brazil's slowdown in exports and growth of imports cut the 
country's trade surplus in May for the second month, the slowest 
pace in almost three years.  The trade surplus in May was down 
12.2 percent to USD 3.02 billion versus the same month of 2005. 
Total exports in May were USD 10.3 billion and imports 7.4 
billion.  The appreciation of the Brazilian currency, which has 
gained around 25 percent versus the US dollar in the last two 
years, has cut export demand of minerals, soybeans, manufactured 
goods and other products.  FIESP analysts said the cut in demand 
will lead to a loss of momentum for exports in the coming months. 
 
¶26.  A Trade and Development Ministry source said the decline of 
the US dollar versus the Brazilian Real provoked a 22 percent 
hike in imports between January and May of this year.  During 
this period, foreign products worth USD 34 billion were imported 
compared to USD 27.8 billion imported in the same period a year 
ago.  Armando Meziat, Secretary of the Ministry of Trade and 
Development said that imports of industrial machinery and capital 
goods are on the rise, an indication that Brazilian industries 
are investing again.  Although consumer goods? participation of 
total imports is small, orders for imports of these products have 
grown the most.  From January to May of this year, imports of 
consumer goods cost the country USD nearly one billion US 
dollars, up 43 percent compared to the same period of 2005.  Only 
in May, imports of vehicles total USD 141 million, 165 percent 
above figures for May of 2005.  Meziat said that if necessary, 
the GOB can implement measures to reduce the inflow of imports. 
"If this happens to become a problem, there are mechanisms to 
neutralize this problem", he said, citing the possibility of 
hiking import tariffs on goods that can prejudice domestic 
manufacturers.  Cumulative surplus from January through May was 
USD 15.4 billion, compared to USD 15.6 billion in the same period 
of 2005.  However, Meziat minimized the trade surplus decline, 
saying it was expected by government authorities.  He projected 
exports to decline 8 percent compared to the 23 percent hike in 
¶2005.  He attributed the decline of exports as well as imports 
due to a strike by Brazilian customs officers begun at the end of 
April.  This strike, he noted, is hampering entry and exit of 
merchandize and is affecting the trade balance. 
 
¶27.  On the other hand, imports totaled USD 73.5 billion in 2005, 
up 17.1 percent.  All import categories reported increases: 
capital goods rose 26.9 percent; consumer goods were up 23.7 
percent; fuel and lubricants climbed 15.7 percent; and, raw 
materials and intermediate goods posted 12.6 percent growth. 
Import demand for raw materials and intermediate goods and 
capital goods were the main items that increased total imports. 
 
                 TABLE III 
CUMULATIVE EXPORTS AND IMPORTS BETWEEN JANUARY AND MAY 2006 (IN 
USD BILLION): 
 
2006           Exports           Imports         Surplus 
----           -------           -------         ------- 
January         9.27               6.43            2.84 
February        8.75               5.93            2.82 
March          11.37               7.69            3.68 
April           9.80               6.70            3.10 
May            10.28               7.25            3.02 
 
Source: Ministry of Trade and Development (MT&D) 
 
BRAZIL'S FDI TOTALED 6.32 BILLION IN THE FIRST FIVE MONTHS; 
FORECAST PREDICTS REDUCED FDI INFLOW IN 2006 
 
¶28.  The Brazilian Central Bank said that turbulence in 
international financial markets is causing harm to the country's 
external accounts.  The Chief of the Brazilian Central Bank's 
Economic Studies Department (DEPEC), Altamir Lopes, forecast a 
 
SAO PAULO 00000880  009.2 OF 009 
 
 
slim FDI inflow in June of not more than USD 500 million. 
Despite weak inflow of FDI this year, Lopes said that DEPEC 
maintained its earlier projection of USD 18 billion FDI inflow 
this year given significant improvement of international 
financial markets.  In May, inflow of FDI was USD 1.58 billion, 
and in the first five months USD 6.32 billion, a monthly average 
of USD 1.26 billion. 
 
BRAZIL CURRENT ACCOUNT SURPLUS UP IN MAY 
 
 
¶29.  According to data released by the Brazilian Central Bank, 
the current account surplus increased in May to USD 475 million 
from USD 241 million in April.  Brazilian Central Bank 
authorities said the May surplus was in line with expectations. 
The current account surplus diminished about 20 percent in May 
compared to May of 2005. However, higher remittances were 
responsible for the pressure on the account.  Sao Paulo financial 
market analysts reported that the reduced current account surplus 
is likely to reflect the expectation of increased pressure from 
remittances of profits and dividends, in addition to a higher 
outflow of interest payments in the coming months. 
 
¶30.  This message was coordinated with Embassy Brasilia. 
 
MCMULLEN