"Paralysis" of GoB's Microeconomic Program

UNCLAS SECTION 01 OF 02 BRASILIA 000666

SIPDIS

NSC FOR SHANNON, DEMPSEY, CRUZ
TREASURY FOR OASIA/SEGAL
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: EFIN ECON EINV ETRD PREL PGOV BR
SUBJECT: "Paralysis" of GoB's Microeconomic Program



1. A column in the March 5-7 issue of top financial daily
`Valor Economico' summarized pessimists' view that the Diniz
scandal and other hurdles have resulted in a semi-breakdown
of the legislative progress of the GoB's so-called
`microeconomic' reform measures, which are generally
acknowledged as vital to sustain Brazil's future growth.
Following is Embassy's unofficial and slightly edited
translation of the column by `Valor' commentator Claudia
Safatle.


3. (Begin Text of Unofficial Embassy Translation)

(HEADLINE) Paralysis is Conquering the Government

The Waldomiro Diniz case is one problem. But the
government's real problem is a different one: economic
growth. This is the grave question to which the government
needs to give quick answers, and for this it needs to break
out of its paralysis. It is not viable to conduct an
economic policy that produces a retraction of 0.2% of the
Gross Domestic Product, loss of real income, fall of per
capita income, and spectacular growth (in the neighborhood
of 140%) in profits of the banking system. Something is
wrong.

From the start of the Diniz episode, from February 13 to the
present, notwithstanding the political tangles which the
government and PT got themselves into trying to manage the
revelation of the corruption of Planalto's ex-advisor, the
Presidency has held endless meetings of the government's
power-nucleus, to try to emerge from paralysis and create a
"growth agenda."

In formulating this initiative, the government has taken
over from the hands of the bureaucracy, and is now parading,
measures to stimulate civil construction, a sector that fell
heavily last year (8.6%). Now, the government is attempting
to announce on an almost weekly basis measures of a more
microeconomic nature to resolve problems that do indeed
restrict investments, without which there will be no growth
at all. And to make these unveilings into events with
maximum impact on public opinion. Among the provisions
already ripe to be announced is a new industrial policy for
four already-defined sectors: software, pharmaceuticals,
capital goods, and semi-conductors.

The resumption of interest rates' downward trajectory is a
central part of the problem and here there is a conundrum to
resolve: the Central Bank sees robust economic growth as
having been underway since last October, with accompanying
inflationary pressures. The CB President, Henrique
Meirelles, has said that the economy finished 2003 growing
at a rate of 1.5% (in the last quarter) which, annualized,
would represent an increase in GDP of 6.14% this year.
Yesterday, in meetings with market representatives in Sao
Paulo, directors of Central Bank reiterated this vision.
"People talk as if Brazil were not growing on a current
basis because of the minus 0.2% from last year, and as if we
will have to strain to grow 3.5% (in 2004). That's not
true. It's nonsense. Brazil is growing at an aggressive
rate and even if we reduce this rate, we will reach 3.5%
growth this year," commented Meirelles to `Valor'.

As the market sees it, in the first two months of 2004 the
level of activity started to go cold and there are no
menacing inflationary pressures on the horizon. The great
majority of banks and consultants are lowering their
estimates of economic growth for this year. Those who
expected 4% are now closer to 3%, and there are those who
project less than 3%...

There has never been, during the existence of the inflation-
target regime established in 1999, as profound a disconnect
as now between the Central Bank and the market in their
respective assessments of the economic situation...

The difficulties in fostering the growth which in the
Central Bank's view is going great guns but as far as the
market is concerned is bogged-down and lacks new investment,
don't stop, however, with the COPOM (Central Bank's Monetary
Committee.) It is just part of the problem and should not
be held responsible for all the nation's ills.

The other part, no less important, has to do with whether or
not the country today has a favorable environment for
investments. The private sector says the environment is
bad, and the government doesn't dispute this view. It even
has a list of things to do to improve things. The challenge
is to turn this generic list into concrete measures in a
quick, effective way.

The new energy model is an example. It took months to
construct a proposal, months to negotiate it, and it was
approved by Congress just yesterday (March 4). The basic
rules for investments in sanitation and water-treatment
circulate from hand to hand along Ministry Row. After the
government announces the preliminary bill for regulation of
this sector, it will be presented for public audience and
only after this process will it go to Congress.

The role of the regulatory agencies was the focus of a
concept document elaborated at the end of last year by the
Civil Household (Casa Civil.). Brought before a public
forum, the document received more than 200 suggested
amendments. The government promised to transform the
document into a bill that would define the exact role of
regulatory agencies, but has not mentioned the subject
since. The sole bill sent to Congress on this subject had
to do with the contracting of employees for Aneel and Anatel
(electricity and telecomm regulatory agencies.)

If it doesn't resume these initiatives, the government will
end up hurting growth in future years, since this year's is
a given...

(End Text of Embassy Translation)

HRINAK