VZCZCXRO5706
PP RUEHRG
DE RUEHBR #0793/01 1621724
ZNR UUUUU ZZH
P 101724Z JUN 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 1852
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRI/AMCONSUL RIO DE JANEIRO 6248
RUEHSO/AMCONSUL SAO PAULO 2196
RUEHRG/AMCONSUL RECIFE 8126
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BRASILIA 000793 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR DUCKWORTH 
TREASURY FOR OASIA HOEK AND TRAN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/ADRISCOLL 
 
E.0. 12958: N/A 
TAGS: EFIN ECON EINV BR
SUBJECT: Brazil: "Sovereign Wealth Fund" aka "fiscal savings fund" 
aka "investment fund" 
 
Refs: a) Sao Paulo 53 b) Sao Paulo 264 
 
(SBU)1. SUMMARY:  Despite its name, GOB interlocutors from Finance, 
Planning and Central Bank agree that Finance Minister Mantega's 
proposal for a "sovereign wealth fund" could more accurately be 
described as an "investment fund" or a "fiscal savings fund" of 
about 10 to 20 bn usd.  Planning and Central Bank interlocutors 
appear considerably more relaxed regarding the current formulation 
of the planned proposal to establish this fund than they were 
regarding previous iterations (reftels).  While Finance hopes 
President Lula will forward a legislative proposal to congress in 
June, exact timing remains unclear.  Mantega's June 8 press 
statements that the fund could draw on oil revenues in three to five 
years to create a 200-300 bn usd fund does not take into account 
that these fields are not expected to generate revenue in this 
timeframe and would likely if eventually formally proposed encounter 
Central Bank and congressional opposition.  END SUMMARY 
 
(SBU) 2. Alexandre da Rosa, Secretary for International Affairs at 
Planning Ministry, told Treasury DAS Brian O'Neill June 2 that the 
current government concept is more accurately described as a "fiscal 
fund," a countercyclical instrument. Demand is heating in Brazil and 
the government needs to reduce its own spending as a component of 
that demand.  Da Rosa stated that this leads to the idea that a fund 
that can absorb excess dollars would be helpful.  Da Rosa indicated 
that Singapore had come to Brazil and explained its sovereign wealth 
fund, and that Finance had discussed sovereign wealth fund 
structures with relevant Gulf states.  Da Rosa underlined that 
reserves were off the table as a funding source for the fund, and 
that Brazil hoped to increase the primary surplus target by 0.5% of 
GDP (or about usd 13 billion/year) to fund this mechanism.  He 
acknowledged that how the resources would be used remains undefined 
- one possibility would be to use the funds to buy down BNDES (the 
National Development Bank of Brazil) debt. 
 
(SBU) 3. In a separate meeting, Alvaro Vereda Oliveira, Finance 
Ministry Assistant Secretary for Financial Organizations and 
Regional Integration, noted Brazil is dealing with an issue that 
would have been inconceivable twenty years ago - how to deal with an 
excess of dollars coming into its economy.  Vereda noted that the 
structural evolution of Brazil in international trade has financial 
consequences and this is the real rationale for the "sovereign 
wealth fund" - it is a structural tool to deal with this situation. 
 
 
(SBU) 4. In a meeting with SFRC Senior Professional Staff Member 
Carl Meacham on June 4, Deputy Secretary of the Finance Ministry's 
National Treasury, Cleber Ubiratan de Oliveira noted that while the 
primary surplus target is 3.8%, as of end-April the surplus was 
4.23% (allowing the GOB to estimate that 0.5% of GDP would be 
available to stock the fund).  Describing the fund as a "key public 
policy alternative fund" given the positive fiscal environment, 
Ubiratan explained the GOB would like to propose expanding the 
primary surplus to 4.5% and use these receipts to expand the fund. 
Responding to Meecham's question, Ubiratan noted that, while 
Petrobras currently contributes about 35% of the primary surplus, 
recent finds (that will take years to exploit) are not expected to 
dramatically affect Petrobras' contributions in the short-term and 
do not figure particularly into the rationale behind proposing a 
sovereign wealth fund. He stated Brazil was unique in that the 
rationale for a sovereign wealth fund was not based on commodity 
revenues, but on its robust reserves and good fiscal position, and 
therefore was not comparable to other countries SWFs. Ubiratan 
characterized the fund as a "fiscal savings fund" using primary 
surplus funds that can be invested on more favorable terms with more 
profitable returns than reserves can generate.  He asserted the 
National Treasury would manage the fund through a financial 
institution, but acknowledged that no regulations or operating 
procedures had been drafted or "appropriate structure and apparatus" 
decided yet. Ubiratan said the fund's investment policy was not 
decided yet but that BNDES would probably "be involved."  Visibly 
nervous answering questions, Ubiratan claimed that all signs 
indicated the Congress would pass the proposal (other interlocutors 
were more realistic).  Finance confirmed the proposal was expected 
to go forward as a legislative proposal rather than as a 
"provisional measure." 
 
¶5. (SBU) Alexandre Tombini, the Central Bank's Deputy Governor for 
Financial System Regulation and Organization, told Treasury DAS 
O'Neill that the Central Bank buying reserves (around 200 bn usd at 
present) helps "soften" the effects of the floating exchange rate, 
 
BRASILIA 00000793  002 OF 003 
 
 
and no major foreign exchange shocks are foreseen for 2008.  He 
considered the Finance Ministry announcement proposing to request an 
increase in the primary surplus target would have a positive effect 
in controlling exchange rates.  He believed that the Finance 
Minister's proposal "as it is now" is fine from the Central Bank's 
perspective.  Noting this is a "fiscal fund" or an "investment fund" 
rather than a classic "sovereign wealth fund" proposal, Tombini felt 
the fund might help Brazil control demand if funds were invested 
abroad, although it would be costly as a demand management tool. 
 
(SBU) 6. In a separate discussion with econoff June 4, Alexandre 
Pundek, senior Advisor to the Central Bank board, noted Mantega had 
wanted the fund as a tool to control the foreign exchange rate - to 
help FIESP and to provide additional funding for BNDES beyond the 
FAT (the workers' fund that is the primary revenue source for 
BNDES).  He said Central Bank at this point is not worried about 
Mantega's fund and feels more comfortable supporting the proposal 
because: 1) the level of the 2009/2010 primary surplus is set in the 
2008 budget law and Finance can not change at this point - they set 
0.5 percent of GDP as the funding target because they can not raise 
more now; 2) Mantega envisions between ten billion and twenty 
billion usd going to this fund.  From Central Bank's perspective, 
the Finance-controlled fund would only be an important player if the 
fund were bigger than the Central-Bank managed reserves (200 bn usd) 
- otherwise, any foreign exchange intervention Finance attempts 
could be immediately countered by Central Bank reserve activity if 
necessary; and 3) any attempt to raise the primary surplus above the 
current 3.8 percent in order to fund the mechanism is highly 
unlikely to survive Congress.  In an election year, Congress will 
not agree to a proposal that decreases public spending at a time 
they want to fund programs popular with the electorate.  He added 
that Central Bank head Meirelles thinks the fund is a good proposal 
in the sense that it would prevent the government from spending at 
even higher levels now that in-coming revenues are higher. 
 
(SBU) 7. Officials at Brazil's National Treasury (Otavio Ladeira, 
Director of Public Debt Strategic Management, and Lena Oliveira, 
Director of Research) strongly defended the establishment of the 
Wealth Fund in a meeting with the Treasury Financial Attache on June 
¶3. They stated that the Fund's overriding purpose was to provide the 
Finance Ministry with room to intervene in Brazil's foreign exchange 
market, helping to manage appreciation of the Brazilian real. 
However, they do not believe this objective will conflict with the 
Brazilian Central Bank's mandate to target inflation at 4.5%. A 
secondary purpose of the Fund is to help finance large Brazilian 
export firms via BNDES credit lines and BNDES purchases of debt 
issued by these firms. The firms that will receive this support will 
be selected by an intra-governmental committee that will include the 
Finance Ministry, Planning Ministry, Ministry of Industry and 
development, and BNDES. Participation by the Central Bank is 
uncertain. The Fund will initially be financed by fiscal resources. 
Ladeira, however, stated that it is possible the Fund will borrow in 
the future to help increase the size of its asset base. Assets will 
consist of foreign currency instruments. Details about the specific 
instruments that might be purchased, however, remains under internal 
discussion. 
(SBU) 8. COMMENT:  While variously presented as a tool to cut 
government spending as a factor in heating demand and as a way to 
maximize return on government investment, GOB interlocutors clearly 
view this fund as a tool to manage foreign exchange rates.  Although 
the timing for putting any legislative proposal forward remains 
unclear (Mantega has said publicly the proposal could go forward by 
mid-June), the sovereign wealth fund is likely to meet with 
congressional opposition, both for inserting Finance Ministry into 
monetary policy and because it would decrease government spending in 
an election year.  Meanwhile, Senator Renato Casagrande (PSB - 
government alliance) announced May 29 that, when the Government 
forwards its proposal to the House for its consideration, the Senate 
will begin to simultaneously consider the SWF proposal he drafted in 
February which proposes that if Brazil's international reserves pass 
ten percent of GNP, the amount over that ten percent should be used 
to establish a fund that would invest in the international market to 
obtain returns higher than US Treasury bonds.  The government 
proposal is expected to rely on primary surplus funds to buy 
dollars, without recourse to reserves.  Behind the scenes 
negotiations among Ministries and with the Central Bank appear to be 
moving GOB toward a proposal that satisfies both Mantega's desire 
for a central role and Central Bank's ultimate control over monetary 
policy.   Mantega's statements to the press June 8 that the fund 
will start small but in three to five years be able to draw on new 
oil field revenues to provide a fund of 200 to 300 billion usd is 
 
BRASILIA 00000793  003 OF 003 
 
 
not realistic given these fields are not expected to begin producing 
in this timeframe.   Any proposal to expand the fund to that size in 
the future would likely encounter renewed Central Bank opposition 
and experience difficulty in the congress.  END COMMENT. 
 
This message was drafted with input from FinAtt Sao Paulo. 
 
SOBEL