VZCZCXRO0240
RR RUEHRG
DE RUEHBR #1325/01 2811312
ZNR UUUUU ZZH
R 071312Z OCT 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2598
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 6714
RUEHSO/AMCONSUL SAO PAULO 2869
RUEHRG/AMCONSUL RECIFE 8550

UNCLAS SECTION 01 OF 07 BRASILIA 001325 
 
SENSITIVE 
SIPDIS 
WHITE HOUSE NSC FOR PRICE SMART TOMASULO 
DOC/ITA/MAC DRISCOLL 
E.O. 12958:N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: BRAZIL: SCENESETTER FOR CEO FORUM - OCT 9/10 - SECRETARY 
GUITERREZ AND AP PRICE 
 
Refs: A) BRASILIA 1051 B) BRASILIA 1063(AID FORE) C) BRASILIA 1048 
D)SAO PAULO 423 (WTO ETHANOL) E) BRASILIA 196 (PAC) F) BRASILIA 1271 
G) BRASILIA 1254 
 
1.(U) Summary:  The relationship between the United States and 
Brazil is as productive and broad-based as it has ever been, with an 
excellent relationship between President Bush and President Luiz 
Inacio Lula da Silva and new cooperation mechanisms on private 
sector priorities (CEO Forum), commercial policy matters (Commercial 
Dialogue), economic policy matters (Economic Partnership Dialogue), 
and biofuels (March 7 2007 MOU), as well as a June civil aviation 
agreement that will permit expanded passenger flights and cargo 
services.  Brazil and the United States share the goals of fostering 
hemispheric stability, promoting democracy, developing a consensus 
on next steps regarding climate change, and achieving a mutually 
satisfactory conclusion to the Doha round of WTO negotiations in the 
near-term.  Energy is increasingly becoming a key element in the 
bilateral relationship as Brazil takes center stage on biofuels 
commercialization and oil exploration.  Regarding CEO Forum 
priorities, USG and Brazil have had Bilateral Tax Treaty discussions 
and continued discussions on bilateral investment issues.  USG has 
supported workforce development initiatives and other exchanges, 
helped organize venture capital events, made significant progress on 
reducing visa wait times, and advanced infrastructure cooperation 
with Brazil; we are now working on a full time USTDA presence in 
Brazil. 
 
¶2. (U) Your visit is an important part of an overall strategic plan 
for developing and highlighting the bilateral energy relationship. 
Building on the success of our bilateral MOU on biofuels, we believe 
it is critical that we expand and deepen U.S.-Brazil energy 
relations as Brazil looks to become a global energy player.  Your 
visit is the third in a series of three high-profile visits to build 
these relationships and to call public attention to the joint 
efforts.  DOE Acting Deputy Secretary Kupfer's August 4-7 visit laid 
the broad groundwork for expanded energy cooperation with Brazil. 
U/S Jeffery's October 2 (Rio) and 3 (Brasilia) visit focused on 
facilitating American involvement in the exploration and 
exploitation of Brazil's newly discovered deep water oil resources, 
next steps in our successful cooperation on biofuels, and how to 
continue to deepen our cooperation on the broad spectrum of economic 
engagement with Brazil. Your visit will include the CEO Forum in Sao 
Paulo and a day in Rio to explore opportunities to expand commercial 
interests, especially in the energy area. We expect the Deputy 
Minister of Mines and Energy to travel to the US for further 
meetings in October, laying the groundwork for the Mines and Energy 
Minister to visit the US in the spring.  We believe these visits are 
critical in demonstrating to the Brazilians that we are strong 
economic partners in multiple areas, as they chart their course in 
developing their newly discovered oil resources and possibly play a 
larger role in ensuring global energy security. 
 
¶3. (U) Your trip also provides a special opportunity to shape the 
future of the U.S.-Brazil broader economic relationship. Our 
bilateral relationship has been extremely strong in recent years and 
Brazilians are acutely aware of the upcoming change of 
administrations and want to know what it means for them.  We expect 
that your meetings will include questions about the transition. 
Particularly in the wake of the stalled WTO Ministerial, affirming 
our commitment to the US-Brazil economic relationship and exploring 
the path forward on trade an other economic issues will be an 
important focu for your trip.  End Summary. 
 
----------------- 
Financial Crisis 
----------------- 
 
¶4. (U) Though your trip is primarily focused on indentified 
priorities of the CEO Forum, the fact that timing coincides with the 
escalating financial crisis means this will be an inescapable topic 
in many of your meetings.  In response to the financial crisis, 
Brazil's Central Bank has partially reversed its hawkish 
anti-inflationary policies by adding 13.2 billion reais to the 
financial system in hopes of freeing up credit and has indicated 
that future interest rate hikes are unlikely given the diminishing 
threat of inflation due to a global slowdown and falling commodity 
prices (that said, analysts widely expect GOB to raise interest 
rates again at the end of October above the current 13.75% SELIC 
rate).  Brazil's Finance Minister continues to assert that Brazil is 
well-positioned to weather the crisis while he and Central Bank 
contacts confirm moves to try to mitigate the effects of the crisis. 
 President Lula continues to criticize the United States for a lack 
of financial regulation, claiming that a global regulatory body is 
needed to address the sitution.  Lula acknowledged publicly for the 
first time very recently, that the Brazilian economy may be 
adversely impacted by the crisis, drawing widespread criticism for 
not having a real grasp on the potential of the crisis.  Although 
Brazilian markets have taken a beating in recent days and the real 
 
BRASILIA 00001325  002 OF 007 
 
 
has seen an erosion of its strength from earlier this year, large 
Brazilian companies are confident that they will weather the storm, 
though there are worries about the effect of 
a tightened credit market for smaller enterprises. 
 
- - - - - - - - - - - - - - - - - - - - 
Shared Interests: Biofuels Cooperation 
-- - - - - - - - - - - - - - - - - - - 
¶5. (SBU)Brazil and the United States signed a Memorandum of 
Understanding in March of 2007 to cooperate on the development and 
deployment of biofuels through a three-pronged approach: bilateral, 
third countries, and global. The most recent meeting of the 
bilateral Steering Committee under the MOU was held October 3, with 
U/S Jeffery leading the meeting for the U.S. side.  We continue to 
make steady progress under all three pillars and post believes that 
Brazil is newly invigorated  to move more rapidly toward achieving 
our joint priorities, in part to due to new leadership at the 
Foreign Ministry and in part due to the desire to show progress at 
the November 17 - 21 biofuels conference being hosted by Brazil. 
¶6.  (SBU) Under each of the pillars of the MOU we are moving 
forward.  Bilaterally, we are working to advance the research and 
development of next-generation biofuels technology. We have had two 
exchange visits between our scientists who have submitted a 
cooperative work plan and developed an MOU between our National 
Renewable Energy Laboratory (NREL)and Petrobras'research laboratory- 
CENPES which will be announced at the November conference. Under the 
third country pillar, we are working jointly to bring the benefits 
of biofuels to select third countries through feasibility studies 
and technical assistance aimed at stimulating private sector 
investment in biofuels. We have thus far done studies and identified 
funding for 21 projects in the Dominican Republic, St. Kitts and 
Nevis, Haiti, and El Salvador.  At last week's meeting of the 
Biofuels Steering Committee, we confirmed our intention to expand 
the program to five more countries (most likely Gutamala, Hondorus, 
Jamaica, Guinea Bisseau, and Sengal, with announcement pending 
notification of those countries).  Globally, to advance the 
commoditization of biofuels, the U.S., Brazil, and European 
Commission (EC), working through the International Biofuels Forum 
(IBF), fast-tracked a process with their respective standards 
organizations improving the compatibility of bioethanol and 
biodiesel standards and codes. 
¶7. (SBU) In addition to the three pillars of the MOU, we have 
reached out to the private sector via the Private Sector Advisory 
Group to elicit their input, interests, and concerns. The Advisory 
Group, which is made up of private sector experts from both 
countries, was informed of activities under the MOU and has begun 
the process of providing input and advice to the Steering Group. The 
Advisory Group recently prepared a well-received proposal to help 
fast track critical certifications in Brazil to facilitate the entry 
of U.S. firms into the market.  The proposal is currently under 
consideration by the Brazilian government.  The Private Sector 
Advisory Group is also making plans for a meeting on the margins of 
Brazil's November 17-21 biofuels conference. 
 
 
¶8. (SBU) On sustainability of ethanol, the Brazilians have agreed to 
work with us to define indicators and criteria for global use via 
the Global Biofuels Energy Partnership Together we are leading the 
process to ensure sustainability is discussed on a scientific basis 
and to avoid having the issue used as a trade barrier.   Hopefully 
this type of cooperation will help to ensure that Brazil will not 
repeat  the type of unfortunate remarks President Lula made at the 
FAO meeting in Rome several months ago differentiating corn and 
sugar ethanol.  We are assured by MRE that this is not their plan. 
Continuing to engage with the GOB is likely the best assurance that 
it will not veer down that path. 
 
¶9.  (SBU) One area where Brazil has been seeking our engagement is 
the upcoming biofuels conference November 17 -21 in Sao Paulo.  GOB 
participants may press you on POTUS attendance and also look for 
assurances of high level participation regardless.  We are told 24 
countries will be represented at the Ministerial level, while the 
Philippines and Australia will be represented at the Head of State 
level.  The GOB is using the conference as an opportunity to 
establish leadership in the field but is open to our ideas on topics 
and outcomes.  We view the conference, in part, as  an opportunity 
to leverage their interest in producing conference deliverables to 
carry some of our goals forward. 
 
 
 
¶10. (U) The ethanol industry in Brazil continues to grow. Petrobras 
just announced the formation of a new multibillion dollar biofuels 
subsidiary to manage Petrobras' entry into the production side of 
the ethanol market.  In the coming year alone, Brazil's production 
of sugarcane-based ethanol is projected to increase 14.8 percent. 
On the demand side, Brazil's use of modest tax breaks have led new 
car purchasers to opt overwhelmingly for "flex-fuel" cars that can 
 
BRASILIA 00001325  003 OF 007 
 
 
run on either gasoline, ethanol, or any combination of the two. 
This year ethanol surpassed gasoline as the major automotive fuel. 
Domestic demand consumes 85 percent of all production.  The other 15 
percent is exported, primarily to the United States.  The ethanol 
private sector is increasingly partnering with international 
companies in building production facilities, as well as addressing 
the internal logistics problems that undermine the profitability of 
ethanol exports.  These include infrastructure bottlenecks in Brazil 
as well as various international tariff regimes. 
 
--------------------------------------------- ---------- 
Beyond Biofuels: Other Energy Cooperation Opportunities 
--------------------------------------------- ---------- 
 
¶11.  (SBU) During his visit here August 4-7, Energy Acting Deputy 
Secretary Kupfer engaged in some very productive conversations with 
GOB officials seeking to identify potential areas of cooperation. 
He heard from the various departments of the Ministry of Mines and 
Energy (MME) a laundry list of things we might do together, 
including cooperating on reinvigorating our respective civil nuclear 
programs, alternative energy sources such as solar and wind, clean 
coal, interconnectivity, energy efficiency, and shale exploration, 
as well as oil exploration.  Under the 2003 MOU, we have the 
mechanism for such cooperation but it is important that now DOE and 
MME establish working groups to move the process forward.  Post and 
DOE are working to set up a DVC to further pursue this 
collaboration. Brazilian Mines and Energy Minister Lobao has 
expressed interest in travelling to the United States this spring to 
continue to deepen this cooperation. 
 
- - - - - -- - - - - - - - - - - - - 
An Emerging Player in the Oil Sector 
- - - - - -- - - - - - - - - - - - - 
 
¶12.  (SBU) The discovery of potentially massive offshore reserves of 
oil and gas estimated to contain between 30-80 billion barrels of 
oil equivalent could put Brazil within the top ten oil countries by 
reserves.  Though the possibilities have generated a great deal of 
excitement, industry observers caution that the technological 
challenges involved with ultra-deepwater drilling are extensive, 
including a worldwide shortage of equipment such as drilling rigs, 
meaning that developments will probably be slow in coming. 
Petrobras appears to be overextended internationally and is 
hamstrung by limited equipment resources.  However, it has launched 
a multi-billion dollar procurement initiative and is reexamining its 
international priorities so that it can focus on domestic 
opportunities.  U.S. oil companies are poised and ready in many 
cases to take on more exploration opportunities - a message that we 
do not believe industry has adequately conveyed to the GOB.  Brazil 
has expressed interest in having U.S. companies involved in the 
exploitation of Brazil's oil reserves as well as in receiving 
high-level U.S. visitors with the intention of developing closer 
bilateral ties. 
 
¶13. (SBU) President Lula and Brazil's National Energy Policy Council 
are expected to announce a regulatory reform plan later this year, 
likely proposing a small, new non-operational state-owned oil 
company to manage the new pre-salt reserves.  Such a company would 
maintain the ownership rights for oil reserves and partner with 
private oil companies through production sharing agreements to 
explore and produce oil in the pre-salt area, possibly following the 
Norwegian model.  Other possible models include increasing the 
government's share in Petrobras, or increasing the government's take 
through higher concessions.  In response to criticisms that the 
process to rewrite the current Petroleum law would be too time 
consuming, Energy Minister Lobao has told us that the Executive has 
fast track legislative measures available to it that should enable 
the legislation to be enacted early in 2009, though Ministry 
contacts have told us that looks increasingly unlikely due to 
concerns over how to handle distributions to states and 
municipalities.  The national oil regulatory agency, industry, and 
analysts believe such a change of legislation would be much more 
complicated, possibly lasting years, thus their interest in 
maintaining the current concession contract model with increased 
royalties. 
 
¶14. (U) Meanwhile, further leasing of all offshore exploration 
blocks has been suspended pending the National Energy Policy 
Council's deliberations; an auction of on-shore blocks is planned 
for December 2008. According to Minister Lobao, there will be no new 
development of  offshore reserves for the near future as the GOB 
defines its approach to the presalt finds, focusing instead on 
on-shore and shallow water exploration. This is a very sensitive 
sovereignty issue for the government, featuring minefields of 
bureaucratic infighting. We have tended to approach the topic by 
offering the observations of our industry and willingness to share 
our experiences in this field, if so desired. 
 
 
BRASILIA 00001325  004 OF 007 
 
 
- - - 
Trade 
- - - 
 
¶15. (SBU) The Brazilians have made a valiant effort to resurrect the 
Doha negotiations and at least publicly have not given up hope that 
the round can still be salvaged.  This is an optimal time to discuss 
the future of trade, regardless of the results of Doha.  Brazil has 
traditionally cited the need to maintain coherence with its Mercosul 
partners and its role as a leader of the G-20 as constraining its 
flexibility in trade negotiations.  Mercosul is an economic 
mechanism created for political reasons.  However, during what looks 
now to have likely been the end-game of the Doha Round, Brazil 
calculated that the benefits to Brazil of agreeing to compromise in 
an attempt to achieve a carefully balanced agreement of industrial 
and agricultural liberalization outweighed the political cost of 
moving beyond Argentina's preferred negotiating position.  This 
decision drew the praise of industry as well as the think 
tank/academic community, which has generally assessed that Brazil's 
move will not have a long-term negative effect on Brazil's position 
within the G-20 or Mercosul.  It has however drawn criticism from 
India which in recent days blamed Brazil's position in Doha on 
efforts to try to curry favor with the U.S. The Lula government has 
continued to try to bring about a resolution to the round, while 
still cultivating its bonds with longtime allies such as Argentina 
through trade missions and development of a currency exchange 
mechanism for bilateral trade. 
 
¶16. (SBU) Although Brazil has made clear it will negotiate FTAs or 
other trade agreements only together with its Mercosul partners, its 
leadership in Mercosul is key to concluding any agreement (REFTELS F 
and G).  Brazil's continuing emergence as a country willing to 
engage on trade and other economic issues in its national interest 
may indicate further potential for expanded interest in economic 
cooperation with the United States.  GOB has made clear its 
continued interest in concluding a Doha agreement in the near term. 
 
- - - - - - - -  - - 
Bilateral Tax Treaty 
- - - - - - - - - - 
 
¶17. (SBU) Treasury's Michael Mundanca and Tom Ralph concluded a 
round of talks September 30-October 2 with the Brazilian Receita 
Federal toward an eventual Bilateral Tax Treaty.  Participants made 
good progress in gaining mutual understanding of each others' 
systems regarding limitation of benefits, capital gains, permanent 
establishment, and withholding taxes and agreed compromises can be 
found on these issues.  Receita was able to accept Treasury's 
proposed language on information exchange, and briefed that the TIEA 
is unlikely to move forward before the end of the year.  Regarding 
transfer pricing, all US treaties incorporate the arm's length 
standard and all US treaties provide for competent authority 
resolution of transfer pricing (and other) disputes.  Due to 
Brazilian legislative constraints unlikely to change in the 
foreseeable future, a treaty with Brazil would not provide for 
either.  Similarly, it would not be possible for Receita to include 
an arbitration clause in a treaty.  We can explore with the CEO 
Forum whether there is industry interest in concluding a Bilateral 
Tax Treaty that would not include arms length transfer pricing or 
dispute resolution. 
 
¶18.  (SBU) Regarding the TIEA, within the business community, 
congress, and even among ministries' officials, ambivalence exists 
on the issue.  Distrust in Receita Federal's (the Brazilian IRS) 
ability to safeguard information and suspicions among some that tax 
authorities mis-collect and mis-use information (fueled by long 
memories here of scandals past) may impact willingness to press for 
further information exchange, depending on the types of information 
requested. This ambivalence regarding information exchange is 
currently playing out in the Congressional ratification process for 
the TIEA.  This more limited "down payment" on the BTT which 
provides for information exchange subject to domestic law 
constraints, has drawn opposition from congressional 
representatives, legal experts and some in the business community as 
allegedly violating the Brazilian constitution.  Prospects for 
passage are uncertain. 
 
- - - - - - - - - - - - - - 
Bilateral Investment Treaty 
 - - - - - - - - -  - - - - 
 
¶19. (SBU) It remains unlikely that Brazil would be willing to commit 
to binding arbitration at the federal, state or municipal level for 
investor-state disputes.  Casa Civil (Dilma Rousseff) to date 
believes contract provisions can govern dispute resolution and that 
an international arbitration mechanism is unnecessary.  Discussions 
with Casa Civil, MRE, Finance, MDIC (Commerce) and CAMEX (roughly 
TPRG) consistently indicate that, for strategic reasons to increase 
 
BRASILIA 00001325  005 OF 007 
 
 
GoB and Congressional confidence in negotiating investment 
agreements, Brazil prefers to start discussions first with 
Argentina, where Brazilian companies have major investments and have 
experienced significant investment problems, according to our 
interlocutors. 
While ministries confirm that the CAMEX-agreed framework that Brazil 
will use to start its conversation with Argentina does not currently 
contain any reference to investor-state dispute settlement, some 
interlocutors are hopeful this element could be introduced over time 
into this dialogue.  We view willingness to engage with Argentina as 
a positive sign that GoB is beginning to tackle investment agreement 
conversations; however, we believe both Brazilian and US business as 
well as USG will need to continue to press in order to convince GoB 
to engage substantively with us on the provisions of a bilateral 
investment treaty in the near term.  We plan a side meeting to 
discuss investments on the margins of the October 30 State/MRE led 
Economic Partnership Dialogue. 
 
- - - - - - - - -  - - - - 
Infrastructure Cooperation 
- - -  - - - - - -- - - 
 
¶20. (U) The USTDA Regional Director for Latin America and the 
Caribbean had an excellent series of meetings in Brasilia, Sao Paulo 
and Rio with Casa Civil, BNDES (Brazil's National Development Bank), 
state governments, and other interlocutors this spring.  USTDA 
developed a preliminary list of possible projects with potential for 
American investment and/or participation (ideas include areas like 
port dredging, oil platform water discharge, urban waste management, 
transportation projects).  USTDA led seven definitional missions to 
Brazil (aviation, oil and gas, surface transportation - rail and 
intermodal, environment - wastewater and solid waste treatment, and 
information technology).  The head of USTDA visited Brazil September 
15-17 to further pursue these projects and signed three grant 
agreements.  USTDA Director Walthers has expressed his readiness to 
add a permanent USTDA person in Brazil in FY09.  In addition, the 
Treasury DAS for Latin America recently visited Brazil to continue 
dialogue with Casa Civil, Planning Ministry and BNDES officials on 
how best to structure infrastructure cooperation. 
 
- - - - - - - - 
Civil Aviation 
- - - - - - - - 
 
¶21. (U) We recently succeeded in significantly expanding civil 
aviation opportunities.  Negotiations in Washington in June 
(following the first round of civair negotiations in ten years in 
December 2007) yielded a June 26 agreement on a package of 
significant liberalization measures.  The agreement, phased in over 
four years, will permit weekly flights to be expanded from 105 to 
154 for each country.  The agreement will, for the first time, 
permit carriers to provide some services on a codeshare basis with 
third-country partner airlines.  Under the agreement, U.S. carriers 
are permitted to serve five new cities in Brazil.  The June 
agreement will expand weekly cargo flights from 24 to 35 immediately 
and to 42 in 2010.  Cargo charter flights will increase from 700 to 
1000, and to 1250 by 2010.  Airlines are already moving to take 
advantage of expanded access. On August 8, Delta and American's 
applications to begin using 21 new frequencies to north/northeast 
destinations were approved. This agreement represents a significant 
new area of cooperation between the US and the recently re-organized 
Brazilian civil aviation authority and lays the foundation for 
increased tourism and investment links between our countries, 
including to the previously underserved north and northeast of 
Brazil.  The agreement provides for further negotiations by 2010, 
and we understand CEOs may press for further liberalization 
negotiations in the near-term. 
 
----- - - - - - - - - - - - - - - - - - - - - - - - - 
Development and Corporate Social Responsibility (CSR) 
- - --- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶22. (U) Despite progress toward consolidating democracy and 
stabilizing the economy, Brazil remains unequal in income 
distribution, with over 50 percent of the nation's wealth 
concentrated in 10 percent of the population. Brazil is home to 50 
percent of the people who live in extreme poverty in Latin America. 
In this context, microenterprise development and increased corporate 
social responsibility can serve as important mechanisms to improve 
Brazil's economic development, social stability and equity.  In 
2006, U.S. companies in Brazil employed 321,477 people and invested 
a total of 205 million reais (approximately $128 million) in 
corporate social responsibility projects in Brazil.  The companies 
supported more than 800 projects and engaged 15,513 individuals in 
volunteer programs.  Ambassador Sobel was instrumental in founding 
the Mais Unidos (More United) a partnership of the U.S. Embassy, 
USAID, and a group of 105 U.S. companies operating in Brazil, 
joining forces in promoting social partnerships to develop 
 
BRASILIA 00001325  006 OF 007 
 
 
innovative solutions to reach underserved populations, to fight 
poverty and inequality, and to promote sustainable social and 
economic development.  USAID Administrator Fore made a successful 
trip in August through which she greatly expanded the visibility of 
public-private partnerships and U.S. efforts in Brazil.  Mais Unidos 
has now established a private sector Board that includes several CEO 
Forum members (Cummins, Intel and Citibank) as well as Microsoft, 
Dow and Bedmon Dickinson. 
 
¶23. (U) Microenterprises account for 99 percent of all formal 
business, employ up to 60 percent of the formal workforce, and 
account for 20 percent of the country's GDP.  Brazil's extremely 
complex business regulatory environment, however, has contributed to 
a high rate of business failure, inhibiting the development and 
sustainability of microenterprises.  USAID-funded economic 
development assistance is focused primarily on strengthening 
microenterprise development and productivity, while challenging 
large corporations operating in Brazil to assume even greater 
corporate social responsibility. 
 
-------------------------- 
BASIC ECONOMIC BACKGROUND 
-------------------------- 
 
¶24. (U) Brazil is the tenth largest economy in the world, and 
received investment grade from Standard and Poor's and Fitch this 
year.  While Brazil is major producer and exporter, exports make up 
only 14 percent of this domestic services-led economy.  Agriculture 
makes up 36 percent of exports and 13 percent of GDP.  Brazil also 
distinguishes itself as a major exporter of civilian aircraft, 
steel, and petrochemicals.  The United States is Brazil's top 
trading partner and China has just moved in position as number two. 
Brazil is both an overseas investor and an FDI destination point, as 
well as being both an assistance donor and recipient.  Having 
recently become technically self-sufficient in oil production (they 
export some but also have to import due to the type of crude Brazil 
currently produces), Brazil boasts a diverse energy matrix and they 
look to become a net oil exporter in coming years.  For all the 
economic progress of recent years (stemming from the stabilizing 
Plan Real implemented in 1994), Brazil remains a relatively closed 
economy encumbered by many 
structural obstacles, and one in which some 40 percent still live in 
poverty, though the expanding middle class has been the largest 
economic story here in the past year. 
 
¶25. (U) Annual GDP growth was 5.4 percent for 2007, and inflation 
approximately 4 percent. GOB's inflation target for 2008 is 4.5 
percent (current estimated inflation is 6.54 percent-the high end of 
the target band) and the government has taken a hawkish approach to 
managing interest rates. The SELIC benchrate now stands at 13.75 
percent and market forecasts expect the SELIC could go as high as 15 
percent by early 2009.  The currency, the real, has appreciated 
strongly, though the financial crisis has caused it to lose ground 
in just the past two months. The global slowdown has had an impact 
on Brazil's trade surplus - for the first seven months of 2008, 
Brazil posted a surplus of 14.65 billion USD, down from 23.92 
billion the same period in 2007.  While the export sector has been 
dampened, the strong currency has permitted Brazilian companies to 
ramp up investment in capital equipment.  Though Brazil has 
maintained an optimistic attitude about its prospects throughout the 
economic downturn and now crisis, President Lula has recently begun 
to strongly criticize the U.S. for a lack of financial regulation, 
which he blames for the problems. 
 
¶26. (U) Foreign direct investment in Brazil is increasing, with a 
net flow of USD 34.6 billion in 2007 (nearly double the USD 18.8 
billion in 2006).  Of total gross inflow of USD 34.3 billion in 
2007, USD 6.1 billion came from the United States, the second most 
from any one source country, number one being the Netherlands. 
Brazilian investment in the United States has almost tripled between 
2001 (USD 1.4 billion) and 2006 (USD 3.9 billion).  The three key 
pillars of Lula's Growth Acceleration Program (PAC) to enhance 
infrastructure investment in Brazil are energy, transportation, and 
sanitation/housing.  GOB recently announced that federal government 
investment spending from January 2008-May 2008 was 7.43 billion 
reais (approximately 14 billion USD), representing a 24 percent 
increase from the same period one year ago.  However, Brazil's 
investment to GDP ratio (17.6 percent in 2007) remains well below 
investment ratios in Russia (21 percent), India (34.6 percent) and 
China (40.4 percent). 
 
¶27. (SBU) There are other major structural challenges to long-term 
growth.  Real interest rates remain the highest in the world at 8.7 
percent, but much lower than 13.5 in 2005. To attempt to improve the 
structural climate, the Central Bank has recently approved new 
Foreign Exchange regulations to reduce costs and paperwork for 
cross-border transactions, which will eliminate 30 day reporting 
requirements as well as reduce taxes on up to 500 million USD. 
 
BRASILIA 00001325  007 OF 007 
 
 
However, growth-limiting distortions in the economy, including a net 
debt to GDP ratio of 42.7 percent (2007), a burdensome tax and 
fiscal structure, and onerous labor and business regulations 
continue to constrain growth.  The informal sector constitutes an 
estimated 40 percent of the economy, in part due to the tax burden 
(36 percent of GDP in 2007 and currently estimated at 37.3 percent), 
one of the highest among large developing economies. Brazil is 
ranked 125 in the Doing Business report (with 152 days to start a 
business) and ranks 92 out of 125 countries for trade protectionism 
according to the World Bank.  Lula's social programs, combined with 
formal sector job growth and real increases in the minimum wage, 
have reduced income inequalities each year since 2004 
(2007/08 GINI is 56.7, compared to approximately 40 in the United 
States). 
 
- - - - - - - - - - - - - 
Political Atmospherics 
- - - - - - - - - - - - - 
 
¶28.  (SBU) Brazil's democratic institutions are generally strong and 
stable. President Luiz Inacio Lula da Silva remains a popular 
president as a result of his orthodox economic policies and expanded 
social programs.  In the Congress, ongoing public scandals involving 
the leadership of the Senate and various members of congress have 
led to low ratings for the institution among the Brazilian public. 
Increasingly, the court system has taken steps to curb impunity 
among public officials.  These steps have been well received by a 
public accustomed to abuses by authorities. 
 
¶29. (SBU) The United States and Brazil share the basic goals of 
fostering hemispheric stability, promoting democracy, preventing 
terrorist and drug transit activity, supporting international 
non-proliferation regimes, and have been working to try to achieve a 
conclusion to the Doha round of WTO negotiations.  The attainment of 
a permanent seat on the UN Security Council has been a central goal 
of Brazil's foreign policy under President Lula da Silva's 
government. Regionally, Lula has maintained Brazil's historic focus 
on stability, seeing dialogue and good relations with all parties as 
the best way to achieve this goal.  As a result, Brazil maintains an 
active dialogue with Venezuela and Cuba, has worked hard to restore 
relations with Bolivia, and has stood firmly on the principle of 
respect for sovereignty in responding to the dispute between 
Colombia and Ecuador, preferring to work through the Organization of 
American States. 
 
SOBEL