VZCZCXRO0497
RR RUEHRG
DE RUEHSO #0208/01 0961253
ZNR UUUUU ZZH
R 061253Z APR 09 ZDK
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9094
INFO RUEHBR/AMEMBASSY BRASILIA 0239
RUEHRG/AMCONSUL RECIFE 4341
RUEHRI/AMCONSUL RIO DE JANEIRO 9100
RUEHBU/AMEMBASSY BUENOS AIRES 3467
RUEHAC/AMEMBASSY ASUNCION 3714
RUEHMN/AMEMBASSY MONTEVIDEO 2888
RUEHSG/AMEMBASSY SANTIAGO 2714
RUEHLP/AMEMBASSY LA PAZ 4092
RUEHME/AMEMBASSY MEXICO 0878

UNCLAS SECTION 01 OF 02 SAO PAULO 000208 
 
SIPDIS 
SENSITIVE 
 
STATE FOR WHA/BSC, EEB/CBA 
 
E.O. 12958: N/A 
TAGS: EINV ECON EFIN ETRD EAGR BR
 
SUBJECT:  BRAZIL'S REGIONAL CITIES FEEL THE EFFECTS OF THE GLOBAL 
ECONOMIC SLOWDOWN 
 
REF:  A. Sao Paulo 92  B. 07 Sao Paulo 754 
 
SENSITIVE BUT UNCLASIFIED - PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  Brazil's regional cities in Sao Paulo State and 
Minas Gerais are feeling the effects of the financial crisis. 
During a March 16-19 outreach visit to several interior cities, 
local business leaders indicated that the current financial crisis 
created a vicious cycle of falling exports coupled with tight 
financing.  The falling exports caused revenue declines in selected 
industries, many of which are now laying-off workers.  The tight 
credit markets also forced many companies, particularly in the sugar 
cane and ethanol sector, to delay large capital projects.  All of 
these factors contribute to a decline in tax revenue for these 
regional cities.  The cities with a more diversified economic base 
are faring better than some of their single-industry peers, but all 
are feeling the pain.  However, even cities that focus on a single 
industry such as ethanol and sugar production believe the long-term 
prospects are good as sugar prices rebound and domestic ethanol 
demand continues to grow.  End Summary. 
 
REACHING OUT TO THE BRAZILIAN INTERIOR 
- - - - - - - - - - - - - - - - - - - - 
 
¶2.  (U) In a four day trip to smaller cities in the Brazilian 
interior, representatives from Pol/Econ, Consular and the U.S. 
Department of Agriculture conducted a series of economic, political 
and public outreach meetings.  From March 16 - 19, representatives 
of ConGen Sao Paulo visited the cities of Ribeirao Preto and Franca 
in Sao Paulo State and Uberlandia and Uberaba in Minas Gerais State. 
 Since this region is predominantly agrarian, they met with 
agribusiness leaders in the coffee, cattle and sugar cane/ethanol 
sectors.  They also connected with industry representatives from the 
footwear and transportation logistics sectors.  While in Uberlandia 
and Uberaba, they met with the Secretary for Economic Development 
and the Mayor, respectively, to learn how these cities are 
confronting the financial crisis and planning for the future. 
 
SUGAR MILLS CONTINUE TO FACE TOUGH TIMES 
- - - - - - - - - - - - - - - - - - - - - 
 
¶3.  U) Silvio Ortega of Pedra Agroindustria S.A.'s Biocycle 
subsidiary (near Ribeirao Preto) discussed the recent troubles in 
the sugar cane and ethanol industries with Consulate representatives 
noting that, for the first time in 20 years, several companies in 
the region filed for bankruptcy.  The ethanol industry in Brazil 
remains fragmented and several players over-leveraged during 
expansion.  With the 2007 and 2008 fall in sugar prices, followed 
closely by the credit crisis, several large mills (notably Santa 
Elisa/Vale and Nova America- since bought by COSAN) are in dire 
straits (Reftel A).  He noted that plans for new mills in the area 
are being delayed pending improvements in the financial markets. 
Moreover, Monika Bergamaschi, President of the Ribeirao Preto 
Chapter of the Brazilian Agribusiness Association (ABAG) noted that 
the capital goods & manufacturing sector in nearby Sertaozinho, a 
city heavily dependent on supplying equipment for new sugar mills, 
is at a standstill.  Manufacturers have laid-off staff and struggle 
with heavy inventories and no new demand.  Anderson Galvao, an 
independent agricultural consultant in Uberlandia noted that of the 
five new mills in the region scheduled to start operating this year, 
four had been postponed and the last is under review. 
 
SINGLE-INDUSTRY-TOWNS SUFFER THE BRUNT 
- - - - - - - - - - - - - - - - - - - - 
 
¶4.  (U) The towns of Ribeirao Preto and Franca are experiencing the 
worst of the regional declines.  The fate of Ribeirao Preto is 
closely linked to that of the sugar cane/ethanol industry while 
Franca relies heavily on shoe manufacturing (Reftel B).  Jose Carlos 
Brigagao do Couto, President of the Franca Shoe Industry Sindicate 
(SindiFranca), noted that Franca is reeling from the dual effects of 
competition from cheap Chinese shoe imports and falling worldwide 
demand as a result of the financial crisis.  He shared that export 
figures for January and February are down a staggering 70 percent 
from the prior year and domestic demand will not make up the 
difference.  (Note:  While Ribeirao Preto and Franca are clearly 
affected by the financial downturn, both experienced economic 
difficulties before the crisis hit.  Falling sugar prices hit 
Ribeirao Preto in 2007 and 2008 and Franca's shoe industry badly 
 
SAO PAULO 00000208  002 OF 002 
 
 
needed consolidation and modernization well before the credit 
crunch.  End Note.) 
 
¶5.  (U) Despite this negative news, unemployment, at least in 
Ribeirao Preto, is not expected to climb significantly.  In meetings 
with industry representatives and University of Sao Paulo (USP) 
economist, Alberto Borges Matias, interlocutors noted that the sugar 
cane harvest would be collected and processed regardless of the 
economic climate.  The mills will commence processing as normal in 
April and May in an effort to generate cash flow.  Borges Matias 
added that he observed a loosening in credit lines in the region and 
that he expects to see Brazil retreat to import-substitution 
measures to prop up employment in the medium term. 
 
DIVERSIFIED PORTFOLIO CRITICAL IN A DOWN MARKET 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶6.  (U) A visit to Uberlandia and Uberaba revealed a different 
economic scenario than Riberao Preto.  Uberlandia Secretary of 
Economic Development, Rafael Porto, noted that while the economy in 
his region is highly dependent on agriculture, the base is more 
diverse than Ribeirao Preto.  In addition to sugar cane production, 
Uberlandia is known for coffee, soy, and corn.  There are also 
strong dairy, swine, and chicken industries.  Due to Uberlandia's 
location in the center of Southern Brazil, it has developed a strong 
logistics industry and receives significant revenue from the 
trucking and transportation sectors.  Leveraging this proximity to a 
trucking hub, a number of wholesalers have bases in Uberlandia and 
their business is, according to Paulo Vitiello Filho, Vice President 
for the Chamber of Logistics Leaders (CDL), "booming." 
 
¶7.  (U) Uberaba has not made as much progress in diversifying its 
economy as Uberlandia, but it does have a more widespread 
agricultural base.  Interlocutors believe it will be able to weather 
the current financial storm.  Uberaba mayor, Anderson Adauto, noted 
that while the region's soy and corn sales are strong, it is 
experiencing a decline in civil construction and petrochemicals 
(mostly fertilizer).  Concomitantly, tax revenues are down 11 
percent year over year and the city is re-examining its budget. 
 
COMMENT 
- - - - - 
 
¶8.  (SBU) Despite some of the negative economic news, the long term 
outlook for these cities (excluding Franca) remains positive.  The 
industries and cities that are suffering today were grappling with 
their problems well before the current crisis began.  Last year's 
poor sugar crop in India is raising sugar prices worldwide, and 
strong domestic ethanol demand should alleviate some of the pressure 
on the sugar cane/ethanol industry as well as the cities that depend 
on the revenue streams they generate.  End Comment. 
 
¶9.  (U) This cable was cleared by The U.S. Consulate in Rio and the 
U.S. Department of Agriculture in Sao Paulo. 
 
WHITE