BRAZIL: 2003 GDP GROWTH EVEN WORSE THAN EXPECTED

UNCLAS SECTION 01 OF 02 BRASILIA 000463

SIPDIS

SENSITIVE

NSC FOR SHANNON, DEMPSEY, CRUZ
TREASURY FOR OASIA/SEGAL
EXIMBANK FOR DIRECTOR FOLEY
FED BOARD OF GOVERNORS FOR ROBATAILLE
USDA FOR U/S PENN, FAS/FAA/TERPSTRA
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC
SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN EINV PREL PGOV BR
SUBJECT: BRAZIL: 2003 GDP GROWTH EVEN WORSE THAN EXPECTED

REFS: (A) Brasilia 450, (B) 03 Brasilia 3682


1. (U) The GoB has revised its 2003 growth number downward
from its already twice-downscaled estimate of positive 0.3%,
to negative 0.2%, Brazil's worst since 1992. In addition to
being half a percentage point below its own most recent
forecast, the growth figure was below those of even the most
pessimistic market analysts, whose last predictions were in
the range of -0.1% to +0.3.


2. (U) Parsing the numbers on the supply side: the 5%
growth in agriculture (9% of the economy) was insufficient
to offset declines of -1% in industry (about 38% of the
economy) and -0.1% in the services sector. On the demand
side, private consumption was down 3.3% and government
consumption up a modest 0.6%, while investment fell 6.6% --
particularly concerning, given the need for infrastructure
investment to reduce Brazil's economic bottlenecks, notably
in transportation. The only unalloyed positive was exports,
up over 14% on the year, helped by the competitive effects
of the Real's devaluation in 2002.


Brazilian GDP
Percent Growth - Seasonally Adjusted


Annual/1 2003 Quarterly Growth/2
2002 2003 1Q03 2Q03 3Q03 4Q03

Total GDP 1.9 -0.2 -0.8 -0.9 0.1 1.5

Supply Side
- Agriculture 5.5 5.0 3.9 0.2 -6.4 7.3
- Industry 2.6 -1.0 -2.1 -3.5 2.6 1.2
- Services 1.6 -0.1 -0.7 -0.1 0.2 0.8

Demand Side
- Consumption
(Private) -0.4 -3.3 -1.5 -1.3 0.4 1.6
- Govt. 1.4 0.6 0.6 0.2 -0.1 0.1
- Investment -4.2 -6.6 -4.6 -6.8 2.3 4.0
- Exports 7.9 14.2 -1.7 4.4 1.2 5.5
- Imports -12.3 -1.9 3.4 -2.1 0.4 8.3

/1 Percent Change on Previous Year
/2 Percent Change on Previous Quarter
Source: Statistics and Geographic Institute (IBGE)


3. (U) The GoB economic team, busily spinning the results,
is pointing out the silver lining: that growth rebounded to
1.5% in the fourth quarter of 2003. Agriculture as usual
led the way on the supply side, with blazing 7.3% growth,
followed by industry (1.2%) and services (0.8%). Exports
and investment led fourth-quarter demand-side growth.
Exports grew 5.5%, and investment, encouragingly, grew for
the second straight quarter (2.3% and 4%, respectively).
Private consumption, the major component of demand, also
rose for the second straight quarter, by 1.6%, after growing
0.4% in the third quarter. In extensive interviews over the
weekend, Planning Minister Mantega and Treasury Secretary
Levy maintained that these figures show the economy bottomed
out sometime in the third quarter of 2003 and has been
growing at a healthy clip since. Lula has been quoted
endorsing the same theme. Even IMF Managing Director Horst
Kohler, briefly visiting Brazil, got into the act, stating
his belief that the Brazilian economy is on a "firm
foundation" for substantial growth this year.


4. (U) The GoB's argument is logical, but we have our
doubts. Multiple recent data points suggest the trajectory
of economic growth in 2004 may prove far flatter than the
1.5% growth of the fourth quarter of 2003 (slightly over 6%
when annualized). National unemployment has begun to climb
again, to or towards new records, to 11.7% in January up
from 10.9% in December (also up from 11.2% in January 2003).
Per capita GDP was down 1.5% in 2003; this feeds through to
average monthly incomes, down 6.2% in the twelve months
ending in January 2004. The Central Bank, after reducing
its benchmark SELIC interest rate by 10 percentage points in
the second half of 2003, has halted the decline in interest
rates at 16.5%. Given market expectations of 5.6% inflation
over the next twelve months, this means a real interest rate
of 10.9%, and commercial-bank spreads on lending to private
entities remain far above even these double-digit levels.


5. (U) The trajectory of investment, up 2.3% in the third
quarter of 2003 and a further 4% in the fourth quarter, is
certainly promising. But will it be sustained in 2004? The
national development bank (BNDES) reports that approvals for
new financing were down 16%, and applications for financing
down over 40%, year-on-year, in January; and according to
the Central Bank total credit actually dipped from 25.4% to
25.1% of GDP between December 2003 and January.


6. (SBU) Admittedly, growth at even half the rate of the
last quarter of 2003 would achieve the low end of the GoB's
3-3.5% target for 2004. A further question is the
sustainability of even such moderate growth into the longer
term. By general consensus, this will depend on the GoB's
timely achievement of a raft of proposed `microeconomic'
reforms to reduce the rigidities of the Brazilian economy
and further overhaul public finances. Expectations for 2004
in this line were always limited, and there is now also the
prospect that the current corruption scandals will weaken
Lula's legislative hand or distract the Congress from
economic reform (Septel). In sum, the advent of a solid GDP
upturn still seems based more on hope than on facts.

HRINAK