VZCZCXRO1339
RR RUEHRG
DE RUEHBR #0654/01 1421747
ZNR UUUUU ZZH
R 221747Z MAY 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4353
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7764
RUEHSO/AMCONSUL SAO PAULO 4091
RUEHRG/AMCONSUL RECIFE 9560
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 BRASILIA 000654 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
STATE FOR WHA/BSC, WHA/EPSC, EEB/OMA MERRIN, EEB/ODF SIEMER 
TREASURY FOR LUYEN TRAN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PREL BR
SUBJECT: BRAZIL: Treasury DAS Nancy Lee - G20 follow-up, political 
economic overview 
 
REFS: A) BRASILIA 257 B) SAO PAULO 216 C) BRASILIA 478 D) BRASILIA 
347 
 
¶1.  (SBU) Summary: Brazilian private and public sector interlocutors 
in Brasilia and Sao Paulo told U.S. Treasury Deputy Assistant 
Secretary Nancy Lee that Brazil's economic downturn may be bottoming 
out.  Bankers, however, were unwilling to predict when investment 
levels would trend higher, which many believe would represent the 
ultimate indication that the economy has turned the corner. 
Meetings revealed an interest in sub-sovereign IFI lending and in 
IDB reform to support needed regional infrastructure projects. 
Finance Ministry interlocutors indicated that they had not excluded 
possibly contributing via the new arrangements to borrow (NAB) for 
the IMF, but remained concerned that IMF members stay focused on 
substantive reform.  Brazilian interlocutors agreed that progress on 
bilateral tax and investment treaties is a political issue and that 
changes to the transfer pricing system would be difficult, and 
recommended framing a BTT as a stimulus to economic growth.  A 
roundtable discussion with political/economic observers commented on 
the unlikelihood of major economic reforms before the 2010 elections 
and on economic policy under various potential future leaders.  End 
Summary. 
 
¶2.  (U) On May 12 and 13 Treasury Western Hemisphere DAS Nancy Lee 
met in Sao Paulo with the small and medium enterprise (SME) division 
of HSBC Bank, Itau Bank's Chief Global Economist, the Brazilian 
Investment Association (SOBEET), Sao Paulo Governor Serra's Chief 
Economic Adviser, and participated in a roundtable with EXIM Chief 
Operating Officer John McAdams and senior bankers including 
presidents from the Brazilian operations of Goldman Sachs and HSBC. 
In Brasilia, she met with the President of APEXBrasil (Brazil's 
export and investment promotion agency), former Brazilian Minister 
of Finance and current Congressman Antonio Palocci, Finance Ministry 
Undersecretary for International Affairs Marcos Galvao and Fazenda 
Chief of Staff Luis Melin, and Minister and Presidential Advisor for 
Strategic Affairs Mangabeira Unger. Lee also participated in a 
roundtable with local political and economic observers, including 
head of the Chamber of Deputies Legislative Consultancy Ricardo 
Rodrigues, Valor journalist Sergio Leo, University of Brasilia 
Professor David Fleischer, and political analyst Thiago Aragao from 
Arko. 
 
ECONOMIC OUTLOOK 
---------------- 
 
¶3.  (SBU) The prevailing view among bankers in Sao Paulo is  Brazil 
is showing some signs of recovery, is in relatively better condition 
than other major economies, and will recover sooner than developed 
and other emerging countries.  The Executive Director and head of 
SME lending for HSBC in Brazil, Walter Oti Shinomata, whose 
sentiment closely mirrored other bankers on DAS Lee's schedule, said 
that Brazil was nearing the bottom of the economic downturn. 
Shinomata cautioned, however, that he was not confident Brazil had 
entered into a definite recovery pattern.  Only John Welch, Itau 
Bank's Chief Global Economist, declared that Brazil was indeed 
pulling out of the economic downturn, saying, "the recovery has 
already started ... in the second half of the year, you will start 
to see it."  Welch, like other meeting participants, remained 
concerned with continuing weak investment activity, but remarked on 
two recent corporate bond issuances as evidence that economic 
fundamentals had begun to improve.  That said, Welch called positive 
economic growth in 2009 a mathematical impossibility (Note: The 
Central Bank survey of financial institutions predicts negative .49 
percent growth in 2009; the investment bank community range closer 
to negative 1.5 percent). 
 
¶4.  (SBU) During the bankers' roundtable, HSBC Brazil President 
Shaun Wallis provided background perspective to explain the 
prevailing higher levels of optimism that Lee encountered in Brazil 
relative to other economies.  He praised government action for 
intervening early with liquidity injections in the credit market, 
including targeted trade credit support, to soften the impact of the 
global crisis in Brazil.  He also referenced Brazilian structural 
economic factors that limited negative global exposure, including: 
diversified trade, net exports representing only two percent of GDP, 
and only minimal dependence on foreign credit.  Finally, to 
demonstrate Brazil's insulation from the harmful impacts of 
excessive leveraging, Wallis pointed out that only four percent of 
privately-owned homes in Brazil carry financing. 
 
¶5.  (SBU) None of the Sao Paulo interlocutors  was willing to 
speculate when investment levels would trend towards pre-crisis 
levels, yet the general consensus was that investment levels had to 
increase before Brazil could safely enter into a recovery period. 
In Brasilia, Ministry of Finance International Affairs Secretary 
 
BRASILIA 00000654  002 OF 003 
 
 
Marcos Galvao said that portfolio investment was returning to Brazil 
since the flight to quality earlier in the crisis, but that other 
issues were still impeding investment growth, most notably economic 
prospects in China and the rest of the world.  Even Itau's Welch, 
the lone analyst who told Lee that Brazil was in a recovery mode, 
explained that the current interruption of investment spending has 
already taken a full point off of Brazil's future GDP growth rate. 
As a direct result, Welch estimates out year (post-crisis) GDP 
growth in the four percent range, down from the five percent 
pre-crisis trend. 
 
INFRASTRUCTURE 
-------------- 
 
¶6.  (SBU) A reoccurring view raised during DAS Lee's meetings is 
that infrastructure spending in Brazil is still lagging behind 
acceptable levels.  Leaders from SOBEET as well as the members of 
Sao Paulo Governor's economic team blame much of the problem on a 
burdensome bureaucracy established by politically motivated 
regulatory bodies.  This institutional environment, they contended 
in their separate meetings, was to blame for the lack of significant 
progress in the Growth Acceleration Program (PAC), Brazil's 
ambitious infrastructure development plan. 
 
IDB LENDING AND MANAGEMENT 
-------------------------- 
 
¶7.  (SBU) A number of officials raised concerns regarding both the 
current management of the IDB and IDB efficiency in working with the 
private sector and in supporting projects in the region.  Alessandro 
Teixeira, President of APEXBrasil, said that 35 percent of IDB funds 
are spent in Brazil -- funds that the Brazilian Development Bank 
(BNDES) gladly accepts as cheap money, but as Teixeira explained, 
also create a source of contention among developing economies in the 
region.  Teixeira also stressed feedback he has received from the 
business community that IDB is difficult to penetrate and does not 
make it easy for commercial operators to work with the institution. 
Teixeira explained that private sector participation is required to 
develop additional infrastructure projects, but that private 
enterprise considers the IDB too bureaucratic.  Teixeira and Palocci 
both expressed concerns that IDB, in its current form, is lacking 
institutional capability.  Teixeira and Palocci indicated 
dissatisfaction with IDB management.  Teixeira was especially 
forthcoming in describing his lack of confidence in IDB President 
Luis Alberto Moreno's ability to manage the IDB. 
 
¶8.  (SBU) Francisco Luna, Chief Economist to Sao Paulo Governor Jose 
Serra, said the state of Sao Paulo currently borrows from the World 
Bank, IDB and the Japan Bank for International Cooperation (JBIC), 
and could use as much financing as development banks are willing to 
extend.  Sao Paulo state is particularly interested in directing 
these resources towards infrastructure projects, notably 
transportation projects in and around the city of Sao Paulo.  Luna 
lamented that the MDBs do not currently have enough money to meet 
demand, and that MDB regulations combined with Brazil's own slow 
bureaucracy create burdensome project lags. 
 
IMF Reform and NAB 
------------------ 
 
¶9.  (SBU) In Brasilia meetings, DAS Lee emphasized U.S. Treasury's 
desire to continue with IMF governance reform while supporting 
current expansion of the new arrangements to borrow (NAB).  As 
previously reported (REF C), Galvao indicated that Brazil remains 
committed to an IMF contribution, and has not ruled out the option 
of contributing via the NAB, but remains concerned that funding 
under the existing NAB mechanism could undermine progress toward 
substantive IMF governance reform.  (Note: Brazil's NAB 
contribution, if made, would occur via bond issuance rather than an 
appropriation. This will allow GOB to label the transaction a form 
of reserve management and thus can sidestep the Congress, where 
political opposition is likely. End Note).  DAS Lee emphasized that 
the USG remains committed to governance reform and said that it is 
in Brazil's interest to take part in the NAB augmentation. 
 
¶10. (SBU) Galvao again conveyed GOB satisfaction with the G20 
process generally and the US approach to consensus-building, 
welcoming that the US will host the next G20 meeting in the fall. 
 
BILATERAL TAX AND INVESTMENT TREATIES 
------------------------------------- 
 
¶11.  (SBU) Meeting participants agreed on the necessity and 
advantages of establishing bilateral tax and investment treaties 
with the United States, yet confirmed that the familiar roadblocks 
 
BRASILIA 00000654  003 OF 003 
 
 
that have hampered real progress for years remain intact.  Both 
Teixeira and Palocci asserted that progress on bilateral tax and 
investment treaties required intervention at the highest political 
levels, and both pledged they would raise the issues accordingly 
within the Brazilian government. 
 
¶12.  (SBU) Teixeira described a Brazilian business community 
becoming more engaged in international transactions and therefore 
applying greater pressure on the government to make progress on tax 
and investment treaties.  Teixeira was responsive and accepting of 
DAS Lee's comments that tax treaty negotiations were hung up on 
Brazilian inflexibility over transfer price and dispute resolution, 
and said he would specifically mention these sticking points with 
President Lula.  Palocci indicated that changes to the Brazilian 
transfer pricing system would be politically difficult and also 
pledged that he would raise the issue of tax and investment treaties 
with Finance Minister Mantega. Palocci suggested a strategy of using 
economic arguments to counter tax revenue concerns.  An independent 
study, Palocci postulated, analyzing the long term benefits a tax 
treaty would have on economic growth and tax proceeds would be 
helpful in this respect.  Congressman Palocci concluded that a 
mandate from Lula and Mantega directing Receita 
Federal(IRS-equivalent)to engage productively could produce a 
proposal acceptable to the Brazilian legislature. 
 
BRAZILIAN POLITICS AND U.S. - BRAZILIAN RELATIONSHIP 
--------------------------------------------- ----- 
 
¶13.  (SBU) In Brasilia, DAS Lee attended a roundtable with 
political/economic observers.  Participants offered views on 
Brazil's 2010 elections and Lula's presidential pick Dilma 
Rousseff's cancer diagnosis, which casts a new layer of uncertainty 
over the probability of a Rousseff and Sao Paulo Governor Serra 
contest.  Analysts believed economic policy would remain roughly 
similar to the Lula administration's under a potential Rousseff or 
Serra administration.  Observers complimented Lula's approach, 
saying that he knows he does not have a deep understanding of 
economic issues, so tends to listen thoughtfully to his advisors, 
weigh opposing viewpoints, and make careful decisions.  In contrast, 
these analysts thought that Serra might tend to overly respect his 
own judgment on economic issues, which potentially could lead to 
decisions that do not fully consider all factors.  On foreign 
policy, participants felt Ministry of External Relations might 
become more influential in policy-setting under a Rousseff 
administration, while Serra might display a tendency to "look 
inward" and potentially pull back from increased international 
engagement.  All agreed now is too early to know for sure who the 
Presidential candidates will actually be because Rousseff's health 
issues or a heretofore unknown scandal emerging regarding one of the 
top four or five candidates or their associates could significantly 
change the field before the election season begins.  Participants 
also agreed that major economic reforms, such as tax or labor 
reform, all of which would be politically challenging, would be 
unlikely to be proposed or to move forward before the 2010 
elections. 
 
¶14.  (SBU) The U.S. - Brazilian relationship was discussed in broad 
terms in DAS Lee's meeting with Minister and Presidential Advisor 
for Strategic Affairs Mangabeira Unger.  While no specifics emerged 
from the meeting, Unger described his view of an amplified U.S - 
Brazilian strategic relationship, and suggested the U.S. Government 
name a counterpart position to his to direct the new relationship 
from the U.S. side.  He proposed that biofuels, SMEs, and education 
could serve as examples, not necessarily priorities, of areas to 
target for collaboration. 
 
¶15.  (SBU) Comment: While the official government sector has 
consistently been more optimistic than the private sector with 
respect to future economic growth, DAS Lee's visit showed that 
Brazil's public and private sector are aligned in their view that 
Brazil is poised for an economic recovery.  On the IMF, 
interlocutors did not exclude the possibility of considering a NAB 
contribution, but continue to worry about maintaining focus on 
governance reform.  Interlocutors' concerns regarding IDB 
management, particularly given Brazilian interest in regional 
infrastructure development, were striking.  End Comment. 
 
¶16.  (U) This cable was coordinated/cleared by the U.S. Treasury 
Attache in Sao Paulo and Consulate Sao Paulo. 
 
KUBISKE