VZCZCXRO3412
RR RUEHRG
DE RUEHBR #1272/01 3021310
ZNR UUUUU ZZH
R 291310Z OCT 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5298
INFO RUEHSO/AMCONSUL SAO PAULO 0016
RUEHRG/AMCONSUL RECIFE 0058
RUEHBU/AMEMBASSY BUENOS AIRES 6393
RUEHSG/AMEMBASSY SANTIAGO 0006
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 04 BRASILIA 001272 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, EEB/IFD/ODF 
TREASURY FOR KAZCMAREK CKELLOGG 
USDOC FOR 4332/ITA/MAC/WH/OLAC 
USDOC ALSO FOR 3134/USFCS/OIO 
USAID FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON BR
SUBJECT: BRAZIL: STAFFDEL MEECHAM - IFI/MDBs REVIEW 
 
REF: A) BRASILIA 950 
 
¶1.  (SBU) SUMMARY:  Officials from both the Government of Brazil 
(GOB) and international financial institutions (IFIs) and 
multilateral development banks (MDBs) operating in Brazil described 
for Carl Meacham, Senator Lugar's senior foreign policy advisor on 
Latin America, a shift from national level development lending to 
the sub-federal level, and a relatively well organized national 
policy that channels IFI/MDB lending to priority projects around the 
country.  Major IFI/MDBs in Brazil portray their relations with the 
GOB as positive and collaborative, and work closely with the 
Ministry of Planning, Budget and Management to align development 
lending priorities.  The Brazilian Development Bank (BNDES) has 
grown into a powerful development lending body in Brazil, vastly 
outpacing the efforts of all IFI/MDB activity in Brazil combined.  A 
meeting with the Ministry of External Relations (MRE) and the 
Ministry of Finance indicates the GOB remains committed to pushing 
for IFI reform in the near-term, particularly within the framework 
of the G-20, but continues to struggle to gain the voice they 
believe they deserve given their successful management of the global 
financial crisis.  END SUMMARY. 
 
BACKGROUND 
---------- 
 
¶2.  (SBU) In response to Senator Lugar's request that the minority 
staff of the Senate Foreign Relations Committee undertake a study of 
IFI effectiveness and financial waste prevention, Carl Meacham 
visited Brasilia and Sao Paulo October 19 - 21.  Mr. Meacham met 
with representatives in Brazil from the World Bank, Inter-American 
Development Bank (IDB), Corporacion Andina de Fomento (CAF), 
International Finance Corporation (IFC), International Monetary Fund 
(IMF), Brazilian Development Bank (BNDES), Ministry of Exterior 
Relations (MRE), Ministry of Finance, and Ministry of Planning. 
(NOTE: approximate annual IFI lending in Brazil: World Bank, USD 5 
billion; IDB, USD 3 billion; CAF, 1.8 billion; IFC, USD .5 to 1 
billion.  BNDES lending surpasses USD 50 billion.  END NOTE). 
 
BRAZIL'S ECONOMIC RECOVERY 
-------------------------- 
 
¶3.  (SBU) GOB officials and IFI bankers expressed universal optimism 
that Brazil has successfully managed itself out of the global 
financial crisis; many declaring that Brazil was one of the last of 
the world's major economies to be pulled into the downturn, one of 
the least impacted, and the first to raise itself out of the crisis. 
 By most macro indicators, Brazil has indeed entered into a recovery 
position (reftel A).  (NOTE: Brazil is projected to end 2009 with 
near flat GDP growth, and reach four to five percent growth in 2010. 
 END NOTE). 
 
IFI/MDB LENDING SHIFT TO SUB-FEDERAL LEVEL 
----------------------------------------- 
 
¶4.  (SBU) Mr. Meacham's meeting with Alexandre Abrantes, the World 
Bank's Program Manager - Portfolio and Operations, detailed a 
gradual shift in World Bank lending from the Brazilian federal 
government level to the state and municipal level.  The World Bank 
is extending USD 4.0 billion to sub-federal governments in the 
current year, approximately 70 percent of their lending activity in 
Brazil.  By contrast, only USD 300 million went to state and local 
governments in 2006.  Abrantes attributed the shift in lending to 
President Lula, who, confident with growing foreign reserves, 
steered IFI lending away from the federal level but asked that 
institutions redirect efforts to the state and municipal level.  IDB 
country representative, Jose Luis Lupo, whose bank now exclusively 
extends loans to the state and municipal level (approximately USD 3 
billion per year), echoed the World Bank's assessment crediting Lula 
for encouraging the shift in the lending landscape. 
 
¶5.  (SBU) Under Secretary for International Affairs Alexandre Rosa 
from the Ministry of Planning, Budget and Management (who's Minister 
is Brazil's IDB Governor) provided additional government perspective 
on the shift from federal to sub-federal lending.  He described a 
complete reversal in IFI/MDB lending from six years ago when almost 
all lending was directed to the federal level, to the current 
environment where almost all lending, approximately 90 percent, is 
conducted at the state and municipal level.  Rosa explained that 
this shift coincided with the federal government's fiscal adjustment 
 
BRASILIA 00001272  002 OF 004 
 
 
period which produced primary budget surpluses (government revenue 
collections minus spending before interest payments) and growing 
international reserves.  He added that the federal government 
maintains isolated small scale lending activities with the IFI/MDBs 
but that these projects are intended to transfer technical expertise 
and bolster long-term relationships with the IFI/MDBs as opposed to 
supplement federal budgets. 
 
POSITIVE RELATIONSHIP BETWEEN IFI/MDBs AND GOB 
------------------------------------------ 
 
¶6.  (SBU) In their separate meetings, the World Bank's Abrantes and 
IDB's Lupo agreed that relations between the IFI/MDBs in Brazil and 
the GOB are strong.  Abrantes commented that, "Brazil knows what it 
wants, is efficient compared to other countries, and has no 
political hang-ups."  Lupo expressed a similar sentiment, saying, 
"Brazil respects institutionality and the rule of law, and has not 
gone down the path of threatening private ownership and wrecking the 
economy."  Both development bankers also cited collaborative working 
conditions with the GOB, specifically with the Ministry of Planning; 
a sentiment that was also expressed by the CAF representative in 
Brazil, Moira Paz-Estenssoro.  Abrantes commended the World Bank 
Country Partnership Strategy, a process that occurs every four 
years, timed to coincide just after the country's presidential 
elections, to coordinate development lending priorities between the 
IFIs and the Ministry of Planning.  More frequent communications 
occur through the Ministry of Planning's COFIEX (External Financing 
Commission), which coordinates ongoing IFI/MDB lending and project 
oversight within Brazil's public sector. 
 
¶7.  (SBU) In the meeting with the Ministry of Planning, Under 
Secretary Rosa also provided additional details on the IFI/MDB 
landscape in Brazil.  Rosa explained that every state in the country 
and many of the large municipalities have direct relationships with 
the IFI/MDBs.  Rosa's role within the Ministry of planning is to 
coordinate these relationships and track the amount of lending and 
project types through mechanisms like the Country Partnership 
Strategy and COFIEX.  Rosa described a positive and collaborative 
relationship between the GOB and IFI/MDBs, but admitted that there 
was a period of confusion as the Ministry of Planning adjusted for 
the shift in development lending from the federal level to the local 
level approximately six years ago. 
 
SAO PAULO IFC PERSPECTIVE: PRIVATE SECTOR, NICHE FOCUS 
--------------------------------------- 
 
¶8.  (SBU)  IFC Country Manager Andrew Gunther and Investment 
Officer, Daniel Susa reported to Meacham in Sao Paulo that the IFC 
plays a niche role in Brazilian project finance (between USD 500 
million and USD 1 billion per year), noting their comparatively 
small presence in the country next to heavyweight BNDES (NOTE: both 
BNDES and IFC focus on private sector.  END NOTE).  Nevertheless, 
Gunther emphasized that IFC loans are an attractive option for 
medium-sized companies looking to access international credit for 
the first time and raise their loan profile.  IFC focuses on 
targeting profitable projects with maximum development impact, 
concentrating on three main loan programs: low-income families for 
educational purposes and microfinance; promoting competitiveness; 
and climate change and renewable energy.  Gunther said IFC has only 
limited engagement with the Brazilian public sector, but does 
coordinate with the World Bank on some projects at the sub-national 
government level and in defining strategic priorities. 
 
IMF SAYS BRAZIL IS GAINING STATURE 
---------------------------------- 
 
¶9.  (SBU) In a meeting with the IMF in Brazil, Resident 
Representative Paulo Medas said that the Brazil-IMF relationship 
underwent a dramatic improvement since Brazil paid off its final 
tranche of IMF loans in 2005, and that the IMF is encouraging Brazil 
to take on greater participation in IMF policy.  Medas described an 
evolution in the relationship between Brazil and the IMF, developing 
from a situation where Brazil felt mistreated to one where Brazil 
feels comfortable playing a leadership role within the IMF, 
especially through the G-20.  On G-20 and IMF coordination, he said, 
"in the last two G-20 meetings, Brazil has really gotten a sense of 
how to work through the G-20, and has learned how to cooperate, 
negotiate, and compromise."  According to Medas, Brazil sees the 
G-20 as their best way to effect change within the IMF, including on 
 
BRASILIA 00001272  003 OF 004 
 
 
their high priority goal of gaining greater representation for 
emerging economies.  He added that while the United States has been 
supportive of a quota shift from developed to emerging nations, 
Europe, especially the smaller European countries, has been less 
enthusiastic to give up representation. 
 
¶10.  (SBU) Despite improving relations, Medas said Brazil still 
exhibits an "anti-Fund" mentality from time to time, has not fully 
embraced the G-20 negotiation process and, further, cautions Brazil 
to be more sensitive to regional concerns.  Brazil, according to 
Medas, remains resistant to IMF technical assistance and 
instruction, but added that Brazilian ministries have recently 
showed signs of technical engagement, making specific requests for 
IMF visits and expertise.  Prior to the last two G-20 meetings, 
Medas said Brazil routinely derailed emerging market consensus, but 
contends Brazil has matured into a more constructive partner.  He 
added, however, that Brazil must still fully adopt the G-20 
negotiation process and said their continued reluctance in this area 
continues to draw international criticism, including from French 
Finance Minister Christine Lagarde, who Medas said delivered the 
message during a recent visit to Brasilia last month.  Medas also 
said that Brazil's growing international clout has prompted 
countries in the region to complain that Brazil is "more forceful 
than the U.S." 
 
MRE AND MINISTRY OF FINANCE, BIAS FOR ACTION AND REFORM 
--------------------------------------- 
 
¶11.  (SBU) In a joint meeting with the Ministry of External 
Relations (MRE) and the Ministry of Finance, MRE's head for 
international financial policy Luis Balduino raised GOB's interest 
in IFI reforms, and expressed that Brazil's current political 
situation is very conducive for near-term progress on IMF reform. 
He reiterated that Brazil wants to see a reformed IMF that is more 
flexible and agile, and more responsive to the needs of the 
developing world.  He commented that there is much less debate in 
Brazil than in the United States with respect to supporting IFIs. 
As an example, he said that when Brazil committed the USD 10 billion 
to the IMF, the move was almost universally accepted in Brazil, even 
within the opposition political parties.  Balduino suggested that 
the political environment in the country was supportive of Brazil 
encouraging IMF reform within the next two years, but also added 
that the United States "should not be too pushy" in asking for 
additional contributions and specific priorities as Brazil considers 
its role and options. 
 
¶12.  (SBU) Artur Lacerda, who monitors World Bank issues at the 
Ministry of Finance, said that Brazil wants to see reforms in the 
World Bank that strengthen its institutional capacities to address 
the global issues of the day: climate change, poverty reduction, and 
development.  He added that Brazil is concerned the World Bank has 
strayed away from its core role as a development institution. 
Lacerda's colleague at the Ministry of Finance who covers the IMF 
portfolio, Ludmila Silva, said that Brazil is now the largest IMF 
donor from the developing world (NOTE: referring to Brazil's recent 
USD 10 billion commitment to the IMF.  END NOTE.), and has shown 
true engagement and knowledge of the institution, yet its 
contributions are still not fully recognized in the IMF. 
 
BNDES - 1,000 POUND GORILLA 
--------------------------- 
 
¶13.  (SBU) A meeting with representatives from the Brazilian 
Development Bank BNDES, which according to Abrantes provides more 
lending in Brazil than the World Bank does throughout the entire 
world, revealed the extend to which the federally-controlled bank 
dominates development lending in Brazil.  According to Ilge 
Iglesias, Congressional Affairs Advisor to the bank's CEO, BNDES 
constitutionally receives 40 percent of a social security and 
unemployment benefit payroll tax collection (FAT) which is 
consolidated into the bank's operating budget and used to fund the 
bank's lending activities.  The bank has grown significantly over 
the last several years, from approximately USD 19 billion worth of 
lending in 2003 to over USD 50 billion in 2008, to the point where 
proceeds from existing operations produce 50 to 60 percent of 
revenues, and the FAT now only comprises 3 to 4 percent.  BNDES also 
receives funding through presidential executive decrees, which have 
increased significantly as President Lula directs additional funds 
to BNDES to fuel the government's growth acceleration infrastructure 
 
BRASILIA 00001272  004 OF 004 
 
 
program (PAC). 
 
¶14.  (SBU) According to Iglesias, BNDES has undergone its own shift 
in operations since Lula assumed the presidency in 2003.  While Lula 
encouraged the IFI/MDBs in Brazil to reallocate lending from the 
federal level to state and local governments, he transformed BNDES 
into a powerhouse banker for Brazil's largest development projects 
around the country.  In contrast to IFI/MDB lending which is 
comparatively more focused towards public sector lending, BNDES 
lending, according to Ministry of Planning's Rosa, is 80 to 85 
percent directed to private and state-owned enterprises.  Lula also 
liberalized BNDES's lending operations, terminating strict lending 
conditions that were in place under the previous Fernando Enrique 
Cardoso presidency.  Iglesias and Isamara Seabra, BNDES Manager of 
Government Relations, believed that BNDES's current focus would not 
change under either one of the leading presidential candidates for 
the 2010 elections, Dilma Rousseff or Jose Serra. 
 
¶15.  (SBU) Meetings in Brasilia produced mixed views on BNDES 
ambitions to undertake future development activities outside of 
Brazil.  Iglesias and Seabra contended that BNDES did not have a 
serious interest in partnering with other emerging and developing 
market countries on development lending strategies, while Ministry 
of Planning's Rosa cited case examples of BNDES helping both 
Argentina and Peru build capacities.  BNDES and Planning were both 
in consensus that BNDES's current primary international strategy is 
to assist Brazilian companies expand and export abroad.  (NOTE: 
BNDES currently has international offices in Montevideo and London. 
END NOTE). 
 
COMMENT 
------- 
 
¶16.  (SBU) Carl Meacham's meetings in Brasilia and Sao Paulo shed 
light on Brazil's IFI/MDB lending environment in the wake of the 
global financial crisis.  As the IMF Resident Representative in 
Brazil, Medas, pointed out, Brazil's comparatively successful 
management of the global financial crisis has bolstered its 
confidence, and encouraged the GOB to be a more constructive and 
vocal partner within the G-20 and IMF.  As Brazil continues to post 
impressive macro "numbers" relative to the rest of the world, and as 
President Lula aspires to leave his mark on the G-20 and 
international fora, the GOB will push especially hard for reform 
within institutions like the IMF and World Bank.  On the other hand, 
Brazil's evolving interest, and past baggage, affects relations with 
the IMF, and the reluctance of some developed economies to fully 
embrace Brazil's perspectives may continue to leave Brazil feeling 
more on the outside rather than in their desired role as leading 
voice for broad IFI reform.  END COMMENT. 
 
¶17.  (U) This cable was coordinated/cleared by Consulate Sao Paulo 
and Senate Senior Staffer Carl Meacham. 
 
KUBISKE