Brazil: The Country of the Future

With Lula 'highly commended' in the world, my last series of posts may have created the impression that I'm negative about Brazil and everything the government Lula does or fails to do. That certainly is not my intention. I am well disposed towards Brazil, where I live, and so it is with a bleeding heart when I see the (often unnecessary) injustice that goes around. What Lula is concerned, I can say that I am indeed very disappointed in what he has implemented during his six years of governing the country.

Almost everything that is achieved is not due to the Lula government, but despite the Lula government. It is the result of an independent continuation of the Plano Real, proposed by the then President Itamar Franco and implemented by his successor and former President Fernando Henrique Cardoso (FHC), and his social politics thereafter. Lula has not fulfilled his socialistic election promises. The economic policy is a continuation of the FHC policy. Social programmes, such as the Bolsa Familia, are based on the policy put in motion by FHC. The growing prosperity of the Brazilian is not due to Lula, but due to the explosive expansion of the private initiative, the discovery of large oil reserves and the (silently admitted) illegal logging of the Amazônia, allowing both livestock and soy and sugar cane production to explosively spread.

Health, Education, Public Safety, Infrastructure, Public Transport are treated like neglected children. Police and Justice fail by all means and the Judiciary is shamelessly 'powerless'. Corruption remains polluting the country unpunished. The with great pomp announced Aceleração do Programa de Crescimento (PAC = Program to Accelerate Growth) is still mainly on the drawing board. The North and Northeast of the country remain backward areas and it looks unlikely that any additional investments will be gained. Senate and Congress are still dominated by a large number of criminals, ah yes, elected by the people. But it can’t be otherwise, as long as the people are accustomed to nothing else than corrupt politicians.

Years ago, the ABN/AMRO bank described Brazil as "the country of the future, and so it will always remain." And it is still so, despite all the progress. The big turning point came during the administration of FHC and Lula has not used his socialistic streak to expand this during his administration. Without a great own vision, he has continued indolently, what was transferred to him by the previous government.
And that disappoints me. I had expected more. The Brazilian people, after so many years of suffering earned to expect more. Take a look at Lula's election promises:

In his inaugural speech in 2002, the word "mudança" (reform, change) took centre stage. "Reform is the key word. This is the main message the Brazilians sent with the elections in October. Because of this, the Brazilian people have elected me as President of the Republic."

And he claimed that all the attention will be given to social action, literally saying: "We should not lose sight that the ultimate goal should be human well-being." After 6 years of government we have unfortunately to observe that safety in the street (robbery and assaults) has reached rock bottom, that education, housing, health care apparently are activities without the necessary glamour, that Brazil can not meet its economic prospects for growth due to a lack of public investments in infra-structure in all corners of the country.

I wish to remain optimistic, and sincerely do not hope that Lula continues to just let Brazil run its course which consequently requires a fierce price to be paid afterwards.
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Lula and the Financial Crisis

Apart from other things, Lula is famous for his blundering utterances in public.

Since the financial crisis in the U.S. started to worsen, president Luiz Inácio Lula da Silva changed his tone.

March 30, 2008: "Bush, my son, solve your crisis."

September 17, 2008: "What crisis? Ask Bush."

September 22, 2008: "Until now, thank God, the crisis has not crossed the Atlantic."

September 29, 2008: "For Brazil, if it comes close, it will be very minimal."

One day later:
September 30, 2008: "The crisis is very serious and so intense that we do not yet know the magnitude of it."

October 4, 2008: "There [in the USA], the crisis is a tsunami. Here, if it reaches us, it will be a marolinha (high wave), not even good enough for surfing."

cartoon: J. Bosco in O Liberal

October 5, 2008: "We want this issue of the crisis presented to Congress."

November 8, 2008 opening the G20 meeting in São Paulo: ”Nobody is safe and all countries will be affected by the crisis.”

During the São Paulo G20-summit (one week before the summit of heads of state in New York), ministers of finance and presidents of the central banks, discussed measures against the financial crisis that began in the United States. The group intended to rally forces to get more influence over the direction of the global economy. In his openings speech, President Luiz Inácio Lula da Silva said that the crisis is serious, requires coordinated actions, and that no country in the world will be spared.
Lula also said that the G7 countries - the United States, France, Italy, Germany, UK, Canada and Japan - no longer are in a position to lead the direction of the world economy solely. He called for more participation by emerging countries arguing that in 2007 these countries accounted for 75% of the growth of the world economy.

’The crisis is global and requires global solutions also. It is time for a pact between governments for the creation of a new global financial architecture.” he said.

For the world press assembled in São Paulo the G20-summit was a nightmare. Due to a failure of the press service, journalists from around the world could not hear Lula’s speech.
While the president gave his speech at the Hilton Hotel, the journalists were confined in a room of the Hyat Hotel, at a short distance of the Hilton, where the meeting took place. All should be watching the speech by Lula via a tv-screen, but the screen did not work.
According to the Ministry of Finance, the transmission system of the NBR failed and the journalists were unable to follow Lula’s speech.
”It is a shame, it is a shame,” shouted the foreign journalists accompanying the meeting of the G20.
Nevertheless the summit was the perfect moment for all who, often only preaching to empty pews, resisted the "neo-liberal" free market economic model highflying in the past few decades. Politicians, economists and social activists want to take advantage of the current financial crisis to bury this model once and for all, together with all forms of speculation.

Since the beginning of the crisis, President Lula gradually changed the tone regarding the crisis in the global financial system and its consequences in Brazil. Apparently the crisis came unexpected, with a huge foreign capital outflow that took both the government and the private sector by surprise. It generated mistrust between banks which stopped lending money.
In a clear change of behaviour, the government and its economic team finally began to realise the seriousness of the problem, that Brazilian companies had with derivatives - bets on the recovery (over-valorisation) of the real - and the over-optimism of President Lula, who came to say that the crisis of Bush would not reach the country.

Some internal contradictions within governments, especially between Central Banks and Economy Ministries, are becoming more acute. In Brazil, the dominance of the monetary authority (the Central Bank) suffered a blow when emergency measures were needed to avoid a greater economic slowdown.

The G20 summit in São Paulo - Minister of Finance Guido Mantega and President Lula

The disagreement between Brazilian Minister of Finance Guido Mantega over the conservative policies of the Central Bank, which advocates high interest rates and an unrestricted floating exchange rate, was already common knowledge. But the crisis and the recommendations of the G20 strengthened Mantega's position. As chairman and spokesman of the meeting, he emphasised the need for anti-recession measures.
The president of the Central Bank, Henrique Meirelles, tried to soft-pedal this approach, underlining instead the concerns over inflation that were also expressed in the meeting’s final communiqué, and the special characteristics of each country.

The G20 summit in São Paulo - president Lula and the CB president Henrique Meirelles

Walking and talking between two fires Lula said that despite the financial crisis Brazil will maintain all works in progress of the Programa de Aceleração de Crescimento (PAC = Program for Accelerated Growth). The president said that the global financial crisis not caught Brazil unprepared and promised that the government will not allow that the country's economic growth will be hampered. "My government and the people have made sacrifices and are now beginning to reap the rewards ... with our expanded home market, which protects us partly of the international crisis," said Lula. "The government will not allow our growth compromised," added the president.

Former President Fernando Henrique Cardoso criticized the way Lula’s government was facing the economic crisis and was ironic, calling Lula a "great economist", in reference to the statements Lula made by calling the crisis a marolinha when coming to Brazil.

“No need to be aggressive with anyone personally, but we have to say that not everything the master is saying, is right, because it is not. We have to say the king is naked here, there, and yonder. Put your clothes on, Mr. President. Do not talk nonsense, Mr. President. Be more consistent with your history. Don’t be as fast in your judgments as the others. Note that a nation is made in the course of generations. Don’t be so pretentious. Be a little more humble,” completed Fernando Henrique Cardoso.

The former president said that people realize when things are not going well.
”I understand that the president have to animate the country. But the country is not silly. The country understands when things change. Things have changed in the world, changed for the worse. It is cyclical? It is momentary? Yeah, but we have to be able to view the future to leave the ruinous situation we are in and don’t continue saying that it is not ruinous. It is ruinous."

But after all nothing really changes. All governments in the world are implementing stimulus programs, not so in Brazil. Apparently the Lula’s statement that all-works-in-progress of the Programa de Aceleração de Crescimento (PAC = Program for Accelerated Growth) will continue is, in Lula’s opinion, sufficient enough alongside the high level interest rates and (disputable) interventions of the Central Bank in the exchange market, selling its stock of dollars to keep the real over-valorised, in favour of the banks, disgracing the products manufacturing segment.

President Lula planting an aroeira tree

sources: UltimoSegundo, O Globo, IPSNews, J. Bosco/O Liberal

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“Passamos A Ser Donos Do Nosso Nariz”

At last we are masters of our own nose

The international rating agency Standard & Poor's announced on 30 April the upgrading of Brazil from BB to BBB- (BBB-(minus): is the lowest rating above non-investment grade BB) with which the country joins the group of "reasonably secure countries for investments". On the stock market in São Paulo (Bovespa) the value of shares rose dramatically after the news broke, while the shares of Brazilian companies listed on the stock exchange in New York joined the euphoria.

President Luiz Inácio Lula da Silva commemorated the promotion to "investment grade" with the words:
"I don’t know how to pronounce the word, nor what it means, but if it is translated into a language Brazilians understand, then it seems, that Brazil is classified as a serious country … .. It is a victory for the Brazilian people, which waited for this moment for years. With this new classification, there is no doubt that Brazil is now a serious country." Clearly alluding to the infamous words of Charles de Gaulle.
According to Lula, the upgrading is of great importance. "It is the guarantee that we are now master of our own nose, and can decide on a policy which we deem suitable for Brazil."

Of course the national press was full of praise and positive analysis and even the international press could not remain at the sideline to extol Brazil to the skies.

The British "The Independent" suggested that the Brazilian economy undergoes a "carnivalesque experience.”
The "Financial Times", meanwhile, put Brazil “among the first countries on the investment list", although it warned that the prevailing high interest rates could impede economic growth.
The French newspaper "Les Echos" wrote that the country "is bathing in sweet euphoria" referring to the absurd stock market rise of 6% in São Paulo within one day.
The Spanish "El País" pointed out that the addition of Brazil to the list of "secure countries" will encourage investors to switch from the speculative markets to a secure investment in this country."
Economists expect that some 1,000 billion USdollar will enter the country.

The essential advantage of the change to investment grade is that large institutional investors, who according to their statutes only can invest in low risk assets, are now allowed to invest in Brazil, as the classification is an instrument that reflects the risk of a country being capable of complying with its obligations. The higher the classification, the lower the risk, and with it the likelihood that investment capital will enter the country.

The president of the Central Bank, Henrique Meirelles (see photo), called the S&P decision "very significant." For him, it shows that Brazil has sufficient immunity against external shocks.

But if everything is so positively judged by everyone, why do I feel so worried about it.
Fortunately I am not the only one as a few critical comments appear on various blogs. Just let’s take one. A résumé of the blog of Jose Paulo Kupfer, a renowned Brazilian journalist.

Résumé: By upgrading Brazil, S&P has completely ignored its own fundamental parameters. Where are the tax reforms, the redesign of the labour legislation and the reconstruction of the social security? And what about the correlation between government debt and GDP, which should be 30%, but actually is more than 40%. And Jose ends by saying: "It looks like, that Brazil has given some "grant" to the "dilapidated" reputation of S&P."

I conclude with my own vision.
Across the board the new classification by S&P has induced euphoria. However, it is questionable whether that is based on real grounds. I admit that the elevated standards for Brazil - to investment grade - will cause an influx of foreign capital. As a consequence, many Brazilian companies can negotiate loans against better conditions abroad, but at the same time, many smaller and medium-sized Brazilian production companies will be pushed even harder to keep up their export due to the USdollar falling further against the real. Although the volume of Brazilian exports measured in USdollars will not diminish, as the overwhelming part consists of commodities (not enriched raw materials and agricultural products), which prices are determined by the market in Chicago, many companies with manufactured products are forced to discontinue their exports. It is obvious, that it will not be beneficial to the country as all manufacturing companies have to concentrate exclusively on the home market. Without doubt the home market will grow, but never to the extent that it will benefit from the S&P classification. Exports of manufactured products will decrease, while the imports increase, both due to the declining value of the USdollar. The trade balance will, as a consequence, entirely rely on the export of commodities whose price is determined by Chicago in which Brazil merely is the direct object. No significant exports in manufactured products with added value almost always lead to a fatal blow to a country.

But there is yet another side to the new upgrading of S&P, which is much more dangerous and could even be disastrous. With the crisis in the U.S. housing market, S&P (and other financial graduators) demonstrated its absolute ignorance, or its involvement in the manipulation of the banking system. It would not be the first time that S & P and its peers manipulate an economy of a country, after firstly praising it into the sky, and then opening the door to hell for the mere benefit of the big money guys.
What is more, we live in a special time cycle. The valuation of the real is only partly due to the performance of Brazil itself and for the other part to the fact that the U.S. is ruled by the worst president of all time and that in an election year the economic cycle of a free fall of the currency always can be observed. That means that after the U.S. presidential elections have given certainty about the successor, the dollar will rise worldwide, as the financial institutions "suddenly" discover new confidence in the economy of the country. This will certainly happen if Barack Obama is elected as president. In the unlikely event that John McCain will be president, I believe, the dollar will probably continue its free fall.

This means that in 2009 another ratio will be seen between the dollar and the real. But beginning in 2009 Brazil seriously starts thinking about the succession of Lula. Herewith we enter the next time cycle of elections, which will have a negative impact on the position of (in this case) the real. We have also seen this during the presidential election to replace the predecessor of Lula, during which the real grossly was manipulated (not to use the word speculated) by the financial institutions with the ABN / AMRO as the frontrunner. If we run in a situation that the U.S. economy shows an improvement, as a result of the appointment of a new president and the period before the Brazilian presidential elections shows no absolute clarity about Lula's successor, the value of the real against the dollar will deteriorate.
That is also the moment the international financial world will withdraw its investments from Brazil to profit in the short term.

I shall illustrate this danger. I read in ValorOnLine, the following:
"The private sector has been hopeful about reducing the financial costs due to the upgrading.
For Renato Vale, president of CCR, one of the largest transport companies in the country, Labor Day was one big party. The CCR, which in March won a concession for a piece of the Rodoanel in São Paulo, is currently negotiating abroad a loan of 1.6 billion reais to be paid to the government of São Paulo. The upgrading of Brazil means a savings of several million USdollars in drawing expenditures on foreign funds."

Ok, let’s assume that CCR indeed attracts BRR 1.6 billion (the rate is now USD = 1.60 BRR, thus USD 1 billion) with an interest rate of 5% from the international market. The investor pays in USdollars and both interest and principal have to be paid back in USdollars. 5% interest means an annual interest charge of USD 50 million or 80 million BRR. Suppose he has a payback period of 10 years. That represents is an annual redemption of 100 million USD or 160 million BRR. Total = 150 million USD = 240 million BRR.
I believe the USdollar will return at a rate of around 2.25 BRR, as a result of two presidential elections, restoration of the US economy, the future expectations of the Chicago commodities market, rising imports and the lack of Brazilian exports of products with added value.
This leads for CCR in a rise in annual payments of 240 million to 337 million BRR. It is of no importance whether the dollar changes +5% +10% or in any other different value. The fact remains that a Brazilian company suddenly is facing much higher operating costs and a much higher debt.

We have seen this before. In Pará during the government of Fernando Henrique Cardoso, shipping companies in the Amazônia region could arrange loans from the BNDES (National Development Bank) to build ships for the expansion of the transport capacity in the region. The loans were in USdollars (rate 1:1), although the revenues of the companies were in BRR. We do not have to detail here (see above) what happened during the election year of FHC/Lula (picture right). Suddenly, but insurmountably, the companies faced payments, which were 2 to 3 times higher, than they were accustomed to. It took many on the verge of bankruptcy.
Brazil is not (yet) in a position to withstand foreign manipulation or speculation as the country’s economic cushion is (still) too fragile.
History repeats itself. Always.

I'm afraid that's Lula’s: “Passamos a ser donos do nosso nariz”, will end up with people getting their nose pinched.

80469 - cartoons courtesy of J. Bosco/O Liberal

The Presidential Elections

In the USA an outburst of emotions is going on with a (mainly feminist) part of the populace thinking it about to be time the first female president of the USA enters the White House, whereby obviously qualifications are of minor importance as long as the next president is a woman, while at the other side roughly 50% of the voters are getting fed up with the idea of Hillary Clinton as candidate for president and they are unable to disguise their hatred and abhorrence of the possibility of a (in their opinion) corrupt, power-hungry, merciless and qualitative disastrous Hillary Clinton as first female president of the USA. In front of that in all quietness Brazil is preparing for its presidential elections in 2010, with the odds very high that there will not only be a female presidential candidate, but probably also will she be elected as the first female president of Brazil. A candidate who not only is worthy to hold the office, but with more than sufficient qualifications to make it a success.

Lula is setting his sight on Dilma Rousseff
March 7, visiting Rio de Janeiro President Luiz Inácio Lula da Silva announced the start of the full-scale improvement works in several favelas (shanty towns) of Rio de Janeiro, which works are a part of the PAC (Programa de Aceleração do Crescimento – A program to accelerate the economic grow).


Valdo Cruz, a reporter for the daily Folha de São Paulo states that, although Lula denies, the implementation of the full-scale scheme serves electoral means. Not even Valdo Cruz belittles the crucial importance of the works to be executed, but reminds us that never before the federal government have been projecting works of this size and with this impact.

“To say, that this program has nothing to do with the upcoming elections is not correct. It is evident, that if the program is successfully executed, this will be beneficial to the position of the government in the elections.”
According to the columnist, Lula spoke about Dilma Rousseff (Casa Civil) as the “Mother of the PAC” and exactly this, still according to Valdo Cruz, proves that Rousseff is the candidate for succession. Asked about a possible PT-candidacy for the Presidency of the Republic, Dilma answered that she only is the coordinator of the PAC.

But who is Dilma Rousseff?
Dilma Vana Rousseff Linhares, born 14 Dec 1947 in Belo Horizonte, is economist and politician, allied to the Partido dos Trabalhadores (Labour Party), and actually minister of the Casa Civil (Casa Civil is more and less the Ministry for Internal Affairs, you could say the Home Office, but the minister is also the First Minister, as it is called here: super-minister, second only to the president as in Brazil the president is the top-executive). She studied at the Federal University of Rio Grande do Sul, graduated in theoretical economy and with Unicamp she got her doctorate in monetary and financial economy.
In the 1960’s, during the military dictatorship, she was a member of leftist clandestine organisations and took part in armed actions. From 1970 to 1973 she was a prisoner and was tortured. In 2003 Dilma became Minister of Mining and Energy and since 21 June 2005 she is the Minister of the Casa Civil.
As minister of Mining and Energy she gained a lot of praise after implementing a new energy model. Her model basically concentrated on two goals: decreasing the energy bills for the consumer and securing the expansion of the energy system, to avoid a new energy crisis as seen in 2001.
The execution of the new model is seen as a classic example of her way the minister is functioning. According to professional outsiders Dilma has the quality to listen and to stimulate ideas, keeping the right of decision making to herself.
The recognition of her technical competence does not protect her from clinching with members of parliament, as she consistently refuses to appoint their (traditionally useless) friends in lucrative positions. Representatives as well as party leaders for the PT are irritated with the controlling influence Dilma and her fellow minister Tarso Genro (Justice) have on Lula.

Running off to the presidential elections
It is obvious that Lula is investigating the eligibility of Dilma as his successor in 2010. For Lula it is a thorn in his flesh that no viable and eligible candidate has arisen in a natural way from the party circles and it is unacceptable for him that the presidency might go to the opposition. Although Dilma denies to be seen as a candidate for president, her recent metamorphose is impressive. Generally very reserved and distant, she suddenly starts to be seen at parties, travelling with Lula and meeting the press frequently. She takes part in photo sessions and spends the best part of her time in political meetings.

The public appearance of the minister is the first strategic move of Lula in his battle against a paradox. After all Lula himself enjoys high popularity rates and commands a government which, in spite of numerous scandals, is well rated by the populace, but is lacking a “natural” successor. Without exception all opinion polls point to the candidates of the opposition as being the favourites (Brazil has a multi party system). The president expects, that his popularity if it remains that way till the elections in 2010, will guaranty the second round for any by him appointed or endorsed candidate.
In the most recent polls the name of Dilma Rousseff was included in the list of possible candidates. Dilma received 5,4% of the vote intention, in contrast with José Serra, the candidate for the opposition party PSDB (Serra was Lula’s opponent in the elections of 2002 and 2006 and belongs to the party of former president Fernando Henrique Cardoso). Lula however is convinced that he can catapult the results.

Just yet Dilma holds back. She thinks she is not sufficiently experienced, is not known well enough by the populace and feels she has not the talent to become a political leader. To improve her obscurity Lula decided that Dilma will accompany him on all his travels. Counter attacking the resistance of the party leaders, who refuse to see a legitimate candidate in Dilma, Lula stipulates that between all possible candidates for the PT, Dilma will be the most likely in the elections. And finally, he argues it is the global movement in politics where more and more female leaders step into the front.
That lefts Lula with the largest problem: How to make Dilma smile. Obscurity is something you can overcome by arranging to get visible, that’s easy. A smiling Dilma is a different cookie, as she has to do it herself, nobody can do it for her.
In the most optimistic projections, market researchers and politician agree that any presidential candidate endorsed by Lula will obtain some 25% to 30% of the popular vote, enough to continue the battle in the second round. But that’s not all. “Only Lula's support will not win the elections. The candidate not only needs a good curriculum but needs impressive political self-confidence to get elected.” says Ricardo Guedes, director of market researcher Sensus.