VZCZCXYZ0000
RR RUEHWEB

DE RUEHSO #0018/01 0111711
ZNR UUUUU ZZH
R 111710Z JAN 10
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 0284
INFO RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION
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RUEHBR/AMEMBASSY BRASILIA
RUEHBU/AMEMBASSY BUENOS AIRES
RUEHCV/AMEMBASSY CARACAS
RUEHLP/AMEMBASSY LA PAZ
RUEHMN/AMEMBASSY MONTEVIDEO
RUEHPE/AMEMBASSY LIMA
RUEHRG/AMCONSUL RECIFE
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSG/AMEMBASSY SANTIAGO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS SAO PAULO 000018 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV PGOV PREL BR
SUBJECT: Private Sector Optimistic for Brazilian Economy in 2010 
 
REF: 09 SAO PAULO 624; 09 SAO PAULO 630; 09 BRASILIA 950 
09 BRASILIA 1354 
 
¶1. (SBU) Summary: Brazilian private sector analysts see a bright 
economic outlook for 2010 with GDP growth nearing six percent, 
inflation remaining within target, and strong job creation. Boosted 
by the enduring impact of GOB stimulus measures implemented to 
weather the global economic crisis and strong domestic consumer 
demand, Brazil has emerged from the financial crisis earlier and 
more robustly than most countries. While inflation pressures and a 
strong currency pose moderate short-term risks, business contacts 
contend that sustained high rates of growth beyond 2010 are 
dependent on curbing the growth in GOB spending, progress on 
long-pending tax and labor reforms, and boosting infrastructure 
investment.  End Summary. 
 
 
 
 
 
2009 Ending Positive 
 
-------------------- 
 
¶2. (SBU) While final data is not complete, most private sector 
analysts agree Brazil's economy closed 2009 on a positive note. 
Despite the global economic crisis' immediate effects on the 
Brazilian economy, the GOB was able to implement timely 
countercyclical measures (e.g. interest rate cuts, tax cuts, 
increased fiscal transfers to households, and softening lending 
restrictions, etc.) that prevented the external shock from reaching 
deeper into employment and income (ref C).  Brazil's economy came 
out of a recession in the second quarter of this year, growing by 
1.9 percent of GDP, and the Central Bank estimates that total 
annual growth may finish positive at around 0.2 percent.  According 
to a study by leading Brazilian bank Itau-Unibanco, without the GOB 
economic stimulus measures the economy would have shrank 3.2 
percent. 
 
 
 
 
 
Economic Growth Likely to Reach Pre-Crisis Levels 
 
--------------------------------------------- ---- 
 
¶3. (SBU) Building off 2009 momentum, the Brazilian economy is 
likely to attain GDP growth levels of around 5.5 percent in 2010. 
Some of our contacts, such as Brazil's Central Bank (BCB) Senior 
Analyst Alexandre Pundek and Itau Bank Economic Analyst Mauricio 
Oreng, are even predicting about six percent GDP growth fueled by 
high domestic demand.  They also cite as drivers the enduring 
economic stimulus measures the BCB and the Lula administration 
adopted in 2009 to weather the global economic crisis.  Santander 
Bank Chief Economist Alexandre Schwartsman says these measures are 
likely to stimulate consumption, output, capacity utilization and 
investment well into 2010.  Echoing the point, an Itau-Unibanco 
study indicates that without the GOB stimulus measures and their 
multiplier effects, the 2010 GDP growth outlook would only reach 
3.7 percent. 
 
 
 
¶4. (SBU) With respect to trade, business leaders expect both total 
exports and imports to increase in 2010 as the global economy 
rebounds.  According to the Federation of the Industries of the 
State of Sao Paulo (FIESP), exports are likely to increase by 16 
percent from the current $152 billion whereas imports are likely to 
increase by 30 percent from the current $128 billion, due to the 
strength of the Brazilian currency and slower global economic 
growth than Brazil.  Nonetheless, FIESP expected Brazil to register 
a trade surplus of $10.5 billion, down from $24 billion in 2009. 
 
 
 
 
 
Output Growth Likely to Boost Job Creation 
 
------------------------------------------ 
 
¶5. (SBU) Brazil is also ending the year with a positive job 
creation record, despite the recession in early 2009.  According to 
the Brazilian Labor Ministry 1.3 million jobs were created this 
year, pushing the unemployment rate down from 7.9 to 7.4 percent. 
Alexandre Schwartsman attributes the Brazilian labor market's 
resiliency to two key factors.  First, companies were reluctant to 
let go of workers despite a decline in industrial production due to 
perceptions that the slowdown would be short-lived.  Second, 
companies wanted to avoid incurring the high cost of firing and 
hiring workers, choosing instead to keep workers even if 
underutilized.  Meanwhile Schwartsman estimates around 2 million 
jobs will be created in 2010 as industrial output rebounds further. 
 
 
 
 
 
 
Central Bank Tightening to Contain Inflation 
 
-------------------------------------------- 
 
¶6. (SBU) Amid the positive outlook, the private sector is 
increasingly expecting the Central Bank to start raising interest 
rates from their historic lows to contain inflation risks. 
According to Schwartsman from Santander, if economic growth for the 
first quarter approaches six percent, then the Central Bank will 
almost certainly raise its benchmark rate early in the second 
quarter.  Yet, if the economy grows closer to five percent, then he 
expects the tightening process will start mid-year.  Most other 
contacts agree that inflation risks are likely to surface in 2010, 
as higher economic growth reduces the output gap, with some like 
Itau's analyst Oreng predicting that the Central Bank will raise 
its benchmark as high as 10.75 percent, or about 200 bases points 
higher than this year's rate, to protect the inflation target of 
4.5 percent. 
 
 
 
 
 
Currency to Experience Minor Election-Year Volatility 
 
--------------------------------------------- --------- 
 
¶7. (SBU) While export industries continue to fret about the 
strength of the Brazilian Real (ref A), up 34 percent against the 
U.S. dollar in 2009, most of our financial sector contacts predict 
the Real will remain strong and not depart significantly from its 
2009 closing of 1.73 R$/USD for most of 2010.  Nevertheless, the 
Real may experience some minor volatility in the run up to national 
elections in October, and as the GOB continues to search for ways 
to quell the Real's appreciation.  A Ministry of Finance official 
said January 4 that the GOB has allowed Brazil's sovereign wealth 
fund to invest in U.S. Dollars, representing another move by the 
GOB to try and stop Real appreciation, but perhaps more 
significantly gives the Ministry of Finance a tool to control the 
national currency, an activity that traditionally resides within 
the Central Bank.  Schwartsman from Santander predicts the Real 
will likely depreciate to 1.8 Reais per dollar, due to election 
volatility. 
 
Economic Risks Could Hamper Long-Term Growth 
 
--------------------------------------------- - 
 
¶8. (SBU) Despite the positive outlook, some in the business 
community worry that the heady recovery expected in 2010 is 
unsustainable in the long-run unless Brazil tackles deeper 
structural issues including fiscal account deterioration caused by 
increased government spending, and competitiveness and efficiency 
shortcomings caused by burdensome labor and tax regulations and 
failing infrastructure (ref D).  In a recent luncheon hosted by the 
Consul General, prominent businessman Roberto Teixeira da Costa 
lamented the lack of progress on an economic reform agenda, a 
tendency by the GOB toward greater policy interventionism, and 
concern that prospects for much-needed amendments to simplify the 
labor code and tax system were slim in the upcoming electoral cycle 
(NOTE: Congressional opposition, unwilling to award additional 
political victories during the Lula administration's final months, 
will make passage of any significant reform measures unlikely this 
year.  END NOTE).  Alexandre Pundek told econoff in Brasilia that 
the Central Bank is concerned about permanent spending increases 
that are taking place within the GOB in government payroll and 
personnel.  The Central Bank and the Ministry of Finance are 
counting on a strong recovery in tax collections to keep additional 
fiscal erosion at bay.  (NOTE: the latest data for tax collections 
in October and November were both recent record highs. END NOTE). 
 
 
 
¶9. (SBU) Meanwhile, Brazil's rate of investment, particularly in 
infrastructure, is failing to keep pace with demand.  Despite its 
impressive recovery from the recession, Brazil continues to lag 
investment in fixed capital as well as in infrastructure.  While 
FIESP estimates 2010 investment will account for 19 percent of 
Brazil's economy, an increase from 2009, much of the boost will 
likely be driven by planning for the upcoming World Cup and Rio 
Olympic Games, as well as offshore pre-salt oil projects.  FIESP 
and other contacts acknowledge that long-term investment remains 
too low, considering IMF calculations that developing economies in 
Asia invest about 42 percent of their respective GDP and the 
world's investment average is 24 percent.  According to Luis 
Fernando Lopes, chief economist at Patria Investimentos, Brazil 
will need to invest about 23 percent of GDP annually to sustain 
economic growth at five percent over the longer term. 
 
 
 
 
 
Comment 
 
-------- 
 
¶10. (SBU) Spurred by government stimulus measures, the increased 
purchasing power of a strong Real, and a burgeoning middle class 
(ref B), Brazil's domestic market, more and more the country's key 
economic growth engine, is poised for a strong year.  Given the 
broad political consensus on sound macroeconomic policies among the 
country's leading candidates, any presidential election jitters are 
unlikely to have a major impact on the economy, aside from some 
minor currency volatility.  Meanwhile, preparations for major 
offshore oil development in the pre-salt region, the 2014 World 
Cup, and the 2016 Olympic Games represent an opportunity to spur 
much-needed public investment.  However, private sector analysts 
make a cogent argument that broad structural tax and labor reforms, 
along with infrastructure improvements and fiscal constraint are 
necessary for Brazil to achieve sustained high rates of growth over 
the longer term.  End comment. 
This message was coordinated/cleared with Embassy Brasilia. 
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