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RR RUEHWEB

DE RUEHSO #0044/01 0221703
ZNR UUUUU ZZH
R 221702Z JAN 10
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 0306
INFO RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION
RUEHBO/AMEMBASSY BOGOTA
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 000044 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV BR
SUBJECT: BRAZIL: PRIVATE SECTOR VIEWS OF THE BRAZILIAN ECONOMY OVER 
THE NEXT 10 YEARS 
 
REF: 09 SAO PAULO 630; SAO PAULO 18; BRASILIA 1354 
 
¶1. (SBU) Summary: Emerging from the global economic crisis, private 
sector leaders are generally confident that Brazil's economy will 
continue to grow over the next decade based on strong investment 
opportunities, stable macroeconomic policies, and favorable 
demographic and external factors.  Nevertheless, uncertainty 
remains as to whether the economy may overheat in the next few 
years and, over the longer term, if it will grow at levels high 
enough to significantly reduce remaining poverty and income 
inequality.  Most analysts agree that in order for Brazil to 
achieve such sustained growth, the next GOB administration must 
pass pending economic reforms in areas such as taxes, labor, and 
infrastructure.  End Summary. 
 
 
 
Investment Opportunities and Domestic Demand to Spur Growth 
 
--------------------------------------------- -------------- 
 
¶2. (SBU) Leading Brazilian bank Itau Unibanco estimates that the 
Brazilian economy is likely to grow over the next decade at an 
average of 4.5 percent annually.  The main drivers for this growth 
include a significant boost in expected investment in areas such as 
energy, including the offshore pre-salt oil development anticipated 
through 2025, and public infrastructure.  According to Mauricio 
Oreng, economic analyst at Itau, private research suggests that 
investment in the pre-salt oil fields will exceed $55 billion over 
the next ten years.  Likewise, research institutions such as 
Fundacao Getulio Vargas predict continued strong demand from a 
growing domestic sector and Brazilian middle class (ref A).  Fabio 
Pina, economist for the trade association Fecomercio, similarly 
emphasized to us that Brazilian economic output will benefit from a 
demographic increase in the share of working age population through 
2020 which will relieve some pressure on public pensions and 
increase the labor pool. Externally, the current global context 
favors investment in emerging economies such as Brazil with high 
potential to expand domestic consumption. 
 
¶3. (SBU) Additionally, world events such as the 2014 World Cup and 
2016 Olympics to be hosted in Brazil will require a significant 
boost in investment in sports facilities, hotels, transportation, 
and urban development, which will stimulate growth in the 
construction and services sectors.  According to Aurelio Bicalho 
economist at Itau, the Rio Olympic Games are likely to contribute a 
0.7 percent increase in GDP growth in each of the four years 
preceding the 2016 event. Beyond the immediate impact of the World 
Cup or Olympic Games, leading private sector associations, such as 
the Sao Paulo Federation of Industries (FIESP) have welcomed the 
events in the hope that resulting improvements in transportation 
infrastructure boost long-term productivity and lower a key cost of 
doing business in Brazil. 
 
 
 
Most Economic Policy to Remain Unchanged 
 
------------------------------------------ 
 
¶4. (SBU) Few private sector observers expect a significant change 
in current macroeconomic policies, regardless of who wins the 2010 
presidential elections.  Economic contacts such as Brazil's Central 
Bank (BCB) Senior Analyst Alexandre Pundek, Itau's Oreng, and 
Santander's chief economist, Alexandre Schwartsman, agree that both 
leading presidential candidates--Dilma Rousseff from the governing 
Workers' Party (PT) and Sao Paulo Governor Jose Serra from the 
Social Democratic (PSDB) party-- are committed to maintaining 
 
 
economic stability for Brazil's growth.  Pundek told Econoff that 
both candidates recognize the current economic model is reducing 
poverty and strengthening the middle class. 
 
 
 
Monetary Policy May Loosen 
 
--------------------------- 
 
¶5. (SBU) One possible area of moderate divergence is monetary 
policy, where Serra has long been a critic of high Central Bank 
interest rates.  While many in the private sector expect rates to 
rise over the next year, as much as four percent according to 
Citibank's President Gustavo Marin, PSDB contacts such as Federal 
Deputy Walter Feldman and independent analysts such as Moody's 
Latin America Director Luiz Tess tell us they expect a Serra 
administration would try to bring rates below Brazil's historic 
average to accelerate growth.  Given the Central Bank's general 
autonomy in recent years and broad aversion to stoking inflation, 
our contacts agree inflation will remain under control, though the 
target range could be slightly higher under a Serra government. 
One key factor on monetary policy in the next GOB administration 
will be the leadership of the Central Bank.  Numerous contacts in 
the financial sector, including Pundek at the Central Bank, have 
pointed to speculation that current Central Bank Governor Meirelles 
may stay on as BCB Governor under either administration, as 
evidence that monetary policy would not change dramatically. 
 
 
 
Economic Obstacles Likely to Remain 
 
------------------------------------- 
 
¶6. (SBU) Although strong investment inflows, stable economic 
policies, a favorable global climate for emerging markets, an 
expanding domestic market, and positive demographic trends, are 
likely to boost Brazilian economic growth, doubts remain about 
long-term sustainability, deep-rooted poverty and lagging 
competitiveness. President Lula has publicly predicted that 
Brazil's economy will grow to fifth largest in the world by 2016, 
and a study by PriceWaterhouseCoopers published on January 22, 
predicts this could happen by 2013. However, skepticism is 
prevalent among private sector contacts as to how growth will 
address income inequality, poverty, and competitiveness issues. In 
conversations with business association leaders such Roberto Costa 
de Teixeira from CEAL and Roberto Giannetti da Fonseca from FIESP, 
optimism about Brazil's economic outlook is tempered with concern 
that opaque and onerous tax and labor requirements, high 
transportation costs due to poor infrastructure, and weak 
investment in human capital will continue to constrain growth and 
poverty reduction.  Despite broad consensus on the need for tax and 
labor reforms as well as greater investment in public 
infrastructure and education, views are mixed on whether the next 
GOB administration, whether led by Rousseff or Serra, is likely to 
tackle the challenge during the next five years.  Pessimists, 
including Schwartsman, suggest that any GOB administration emerging 
from the 2010 elections is unlikely to have the political support 
to push sensitive tax and labor reforms.  However, others, such as 
Luiz Fernando Figueiredo, Chief Portfolio Manager at Maua 
Investimentos, and Octavio de Barros, Chief Economist at Bradesco 
Bank, have told us they expect both candidates to recognize the 
limited political window to address these issues and propose at 
least partial reforms early in their tenure.  According to Barros, 
reforming the tax and labor regimes would boost economic growth by 
at least 1.5 percent of GDP annually.  Finally, near-term concerns 
exist that increased government spending may be eroding the GOB's 
recent record of solid fiscal management (ref C). 
 
 
 
Comment 
 
-------- 
 
¶7. (SBU) Brazil has made impressive progress in achieving sustained 
economic growth and reducing poverty in recent years. Favorable 
economic conditions and a broad political consensus on preserving 
macroeconomic stability suggest Brazil, even without necessary 
reforms, will continue to grow respectably over the next decade at 
rates comparable to the 2003-08 period.  Nevertheless, the 
inefficiencies and infrastructure constraints identified by private 
sector contacts remain a significant hurdle to achieving the higher 
growth rates necessary to fully address Brazil's income inequality 
and raise the country to "developed" within the next decade.  End 
Comment. 
White