VZCZCXRO1143
RR RUEHRG
DE RUEHSO #0680/01 3541807
ZNR UUUUU ZZH
R 191807Z DEC 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8803
INFO RUEHBR/AMEMBASSY BRASILIA 9955
RUEHRG/AMCONSUL RECIFE 4261
RUEHRI/AMCONSUL RIO DE JANEIRO 8955
RUEHBU/AMEMBASSY BUENOS AIRES 3353
RUEHAC/AMEMBASSY ASUNCION 3600
RUEHMN/AMEMBASSY MONTEVIDEO 2824
RUEHSG/AMEMBASSY SANTIAGO 2600
RUEHLP/AMEMBASSY LA PAZ 4009
RUCPDOC/USDOC WASHDC 3233
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000680 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK, BONEILL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: BRAZIL'S BUSINESS OUTLOOK FOR 2009 NOT GOOD 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  Despite Brazil's impressive September economic 
performance, most of the domestic indicators show that 2009 will be 
a difficult year.  Contacts across Brazilian business sectors told 
the Consul General that they are preparing for difficult times in 
¶2009.  Early indicators of consumer goods sales and industrial 
production point to softening fourth quarter growth and indicate a 
slide into a much weaker 2009 economic performance.  In particular, 
the auto industry has been hard hit in Brazil.  This will 
reverberate back to the United States as Brazilian auto sales had 
led profitability indicators for many U.S. auto manufacturers. 
Consensus expectations for Brazilian economic indicators are rapidly 
declining, with GDP growth in 2009 expected at only 2.5 percent 
compared with 5.7 percent in 2007 and an expected 6 percent in 2008. 
 With tax revenues declining due to slumping production and slowing 
consumption, the GOB will need to balance fiscal stimulus measures 
to boost the economy while keeping overall spending under control. 
End Summary. 
 
Growth On Track Through September 
--------------------------------- 
 
¶2.  (U) The Brazilian economy had a record performance in the third 
quarter, with growth up 6.8 percent over the same period in 2007. 
With the most recent numbers, Brazil is on the path for 
approximately six percent GDP growth in 2008.  Private consumption, 
investments, and government expenditures were the drivers for this 
impressive jump in GDP.  Domestic demand contributed about 10 
percentage points to the overall output growth, while net exports 
again were a negative drain on the economy of nearly three 
percentage points. 
 
But Will Not Continue 
--------------------- 
 
¶3.  (U) Despite the surprisingly positive numbers through September, 
most of the indicators for domestic performance suggest this trend 
will not continue into the last quarter.  October retail sales 
plummeted, down eight percent from September.  Vehicle sales alone 
are down 25 percent from November 2007 numbers and consumption and 
energy usage are showing anemic, marginal growth.  At the same time 
that domestic production and consumption have decreased, private 
investment is showing signs of weakening because of declining 
business confidence and a lack of liquidity from both domestic and 
international sources.  Indeed, foreign direct investment in 
November was down 14 percent from last year. 
 
¶4.  (SBU) In a recent meeting with the Consul General, several Sao 
Paulo business leaders underscored the "doom and gloom" ahead 
despite the record third quarter growth.  Motorola executives told 
the CG that they were expecting a grim 2009.  The currency 
depreciation has shocked them and they were forced to sacrifice 
their margins.  Despite this, they still expect a five to 10 percent 
drop in cell phone sales in Latin America for 2009.  GE said that 
the company's longer production cycle has helped their performance, 
but they expect a slowdown in late 2009.  Caterpillar, though still 
positive, believes tough times are ahead.  Orders are down 15 
percent for 2009 across business units, and it has modified its 
budget to include a higher exchange rate of 2.38 Reals to the USD. 
The depreciation of the Real has made their export business more 
attractive and they expect significant increases in export of heavy 
machinery for 2009.  3M said that its auto parts division was 
starting to show signs of weakness, but that overall sales were up 
20 percent over last year. 
 
¶5.  (SBU) Sectors that include basic goods have not yet seen the 
effects of the crisis, but told the CG they expect a slowdown by 
mid-2009.  Colgate said that its sales so far have been positive or 
stable.  International Paper had record sales in October due to 
school supplies and that 2008 sales were up by five percent. 
Despite this, investments in paper are being postponed and demand 
for pulp is down significantly.  U.S. sales are down six percent in 
the fourth quarter over last year.  Eli Lilly said its sales had 
been strong because the GOB was concerned about the health budget 
and had been building inventory in its high-end products. 
 
SAO PAULO 00000680  002 OF 003 
 
 
 
¶6.  (U) Even the large Brazilian multinationals have started showing 
signs of weakness.  Brazilian industrial production in October slid 
1.7 percent compared to September, and Itau Bank estimates November 
numbers will be down some five percent over last year.  Embraer 
announced it would cut new aircraft deliveries from 315 to 270 units 
in 2009.  Company officials refuted press reports that it is 
preparing to fire 4,000 employees, but did not rule out possible 
workforce cuts.  One of Embraer's suppliers, Grauna Aerospace, 
manufacturer of precision parts, let go 10 percent of its 500 
employees last week.  Vale cut 2.1 percent of its workforce because 
of slumping global demand, five weeks after announcing a nine 
percent iron ore production cut.  In a survey conducted November 6 
to 14 by the National Chamber of Industries (CNI), 88 percent of 
Brazilian industrial firms surveyed responded that the global 
economic crisis is starting to directly affect their businesses. 
The most significant effect is a decline in demand, followed by 
higher machine costs, and tighter credit conditions.  Seventy-one 
percent of firms reported that they have already reduced their 2009 
investment budgets.  Forty-nine percent of firms believe the 
economic crisis will be fully resolved in 2009, while 40 percent 
believe it will continue until 2010. 
 
U.S. Automakers Hit Hard 
------------------------ 
 
¶7.  (U) The effects of the crisis are clearly being felt strongly in 
the auto sector.  After the three big U.S. auto manufacturers 
redoubled efforts to ramp up production in Brazil, adding extra 
shifts, thousands of workers, and millions of dollars in new 
investments in 2007 and 2008, production has slowed sharply.  As 
credit for auto loans dried up in October, it became more expensive 
to secure auto loans.  Dealers that previously offered six-year 
financing with no down payment are now asking for 50 percent down 
and financing over a two-year period.  Ivan Favarin, a sales manager 
at a GM dealership in a middle-class neighborhood of Sao Paulo said 
that the uncertainty about the future economic situation has reduced 
demand for new cars as well.  (Note:  The GOB recently moved to 
reduce and in some cases eliminate certain industrial product excise 
taxes including for vehicles in an effort to spur consumption.  Post 
will monitor this as it develops and report septel concerning its 
impacts.  End Note.)  Manufacturers have put many of their workers 
on mandatory vacation to idle assembly lines as stocks of unsold new 
cars began climbing.  Layoffs are also in the works as Volvo, a Ford 
subsidiary, became the first to announce layoffs, cutting 430 
workers from a plant in Curitiba, about 18 percent of its workforce 
in Brazil.  GM has started offering new retirement incentives as 
well. 
 
Comment 
------- 
 
¶8.  (SBU)  The effects of the global financial crisis are starting 
to permeate the Brazilian business community as even those sectors 
thought to be relatively immune from the crisis are showing signs of 
weakening demand.  Consensus expectations in Brazil are rapidly 
declining across all indicators.  Despite the consensus GDP growth 
of 5.2 percent (and perhaps up to six percent) this year, the 
financial community is preparing for a rapid deceleration in GDP 
growth to some 2.5 percent next year.  Fourth quarter data in Brazil 
is likely to show the more pronounced effects of the crisis and will 
begin to clarify the impacts of the crisis for Brazil's economy 
going into 2009.  Government receipts are already slowing due to 
slumping production and demand.  With lower GDP growth expected next 
year, the GOB will have to tighten the purse strings to keep its 
fiscal accounts in order or move the target for the primary surplus. 
 The Central Bank will face enormous pressure to cut interest rates 
January 20 when the year-end economic indicators start to show a 
real economic decline.  (Note: The Central Bank kept interest rates 
steady at 13.75 percent on December 10 largely due to concerns over 
inflation, but foreshadowed cuts in January that many expect could 
be as great as 0.75 percentage points.  End Note.)  Though Brazil is 
well positioned to fight off the crisis due to large international 
reserves (including USD 150 billion in U.S. Treasury bills-the 
world's fourth largest holder of these instruments) and relatively 
more liquid banking sector, all indicators are predicting a 
 
SAO PAULO 00000680  003 OF 003 
 
 
difficult year in 2009.  On the political front, the Lula 
Administration will have to fight to shield itself from blame and 
the opposition parties appear to be gearing up to do just that.  End 
Comment. 
 
¶9.  (U) This cable was coordinated/cleared by Embassy Brasilia and 
the U.S. Treasury Financial Attach in Sao Paulo. 
 
WHITE