HOPES AND FEARS: BUSINESS COMMUNITY VIEWS OF BRAZIL'S

UNCLAS SECTION 01 OF 04 SAO PAULO 000229

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STATE PASS USTR FOR SULLIVAN/LEZNY
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/USFCS/OIO/EOLSON/DDEVITO/DANDERSON
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E.O. 12958: N/A
TAGS: ECON PGOV PINR ETRD BR
SUBJECT: HOPES AND FEARS: BUSINESS COMMUNITY VIEWS OF BRAZIL'S
UPCOMING ELECTIONS AND THE NEXT GOVERNMENT

REF: RECIFE 29

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1. Summary: An informal survey of business leaders from Sao Paulo
shows support for Finance Minister Antonio Palocci's macroeconomic
policies and a general sense of relief that Lula's presidency has
not destroyed the economy as originally feared. Although Lula is no
longer seen as a threat to the economy, he still makes many
businessmen nervous. If re-elected, they believe he is unlikely to
make significant changes to the direction of the economy, as he will
have to govern in alliance with such centrist and center-right
parties such as the Brazilian Labor Party (PTB),the Liberal Party
(PL),and the Brazilian Democratic Movement Party (PMDB). The
private sector has developed an agenda of issues it would like the
next government to address, including tax reform, labor reform,
reduction of public expenditures, and simplification of the
regulatory environment. The business community would prefer to see
a candidate from the opposition Brazilian Social Democracy Party
(PSDB) elected in the October presidential election, and many favor
Sao Paulo state Governor Geraldo Alckmin, believing that he would be
more capable than Sao Paulo Mayor Jose Serra of advancing their
economic agenda. End summary.

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2006 ECONOMIC AGENDA
--------------


2. The National Confederation of Industries (CNI),a business
umbrella organization which represents state Federations of
Industries (of which the most influential is the Sao Paulo State
Federation of Industries - FIESP),is poised to publish its economic
agenda for the post-election period, a guide for whomever is elected
the next President. The agenda reportedly has the concurrence of
other business organizations. Its main recommendations are:

-- Cutting interest rates. While business supports the Lula
administration's macroeconomic policy, including its efforts to
combat inflation, it believes that a speedier pace of interest rate
reductions is possible.
-- Control of public expenditures. The Lula government has devoted
more resources to social programs while withholding funds for
investment. The business community would like to see these
priorities reversed.
-- Greater public investment in infrastructure and implementation of
public-private partnerships (PPPs). The PPP idea was introduced
during the government of Fernando Henrique Cardoso (FHC) to spur
infrastructure investment. Although the Lula government obtained
Congressional approval of enabling legislation, currently the
program exists mostly on paper.
-- A clear regulatory framework for energy, telecommunications,
transportation, and natural gas.
-- A framework for environmental regulation that clearly defines the
roles of responsible agencies in developing and enforcing the
rules.
-- Tax reform
-- Labor law reform
-- Public investment in technology (R&D)


3. Of the items listed above, investment in infrastructure is
considered the most urgent by many in the business community. As
the economy grows, so does demand for energy, roads, railroads, and
port facilities. FIESP believes the country's infrastructure is in
such a critical state of obsolescence that it is adversely affecting
the efficiency and global competitiveness of Brazilian companies.

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BUSINESS PERSPECTIVES
--------------


4. In 2002, Lula was generally seen by the private sector as a
dangerous candidate. With his labor union background and leftist
orientation, he seemed to many to pose a threat to foreign
investment and private enterprise in Brazil. A turning point in his
campaign was his "Letter to the Brazilians," in which he promised to

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respect international contracts and commitments and pay Brazil's
debts, thus easing private sector fears.


5. Four years later, his performance is viewed with amazement. The
business community had such low expectations for his presidency that
now, though it may not approve of some of his policies, it considers
his performance surprisingly good. Nonetheless, some are still
nervous, noting that Lula has not been tested by an international
crisis and it is impossible to know how he would react under such
pressure.


6. Another concern among business leaders is what Lula might do if
it appears he might lose the election. Would he undertake populist
measures in an attempt to turn the tide? Would he be tempted to
follow the example of Venezuelan President Hugo Chavez and stifle
democratic opposition? Would he abandon fiscal and monetary
discipline, possibly re-igniting inflationary pressures? No one is
quite sure, which causes unease in the business community.


7. Lula has some, albeit not many, supporters among businessmen.
One is CNI president Armando Monteiro Neto, a PTB federal deputy
from the northeastern state of Pernambuco. Monteiro owns a sugar
factory and is extremely dependent on government loans and benefits.
Similarly, CNI and other such business organizations are highly
dependent on the government for funding, which comes from business
taxes paid by companies. If the government were to suspend these
mandatory contributions, it would force these organizations to find
other sources of funds.


8. Other business supporters of Lula include Antoninho Marmo
Trevisan (Trevisan Auditores e Consultores),Oded Grajew (founder
and former CEO of Troll, a toy company),and Laurence Phi (owner of
a large wheat mill),all of whom are progressive businessmen
strongly tied to social causes. They believe Brazil is a country
lacking in social justice and that Lula is going to change this.
Another businessman, Vice-president Jose Alencar - owner of
Coteminas, Brazil's largest textile firm - entered into an alliance
with Lula more out of political opportunism than commitment to
Lula's social agenda. More generally, the banking sector has
supported Lula and has contributed generously to the PT; recently
released figures show the banks earning record profits.


9. Although Lula has succeeded in obtaining the support of
traditional elites that generally represent the Brazilian right, on
many issues his government has not promoted the core interests of
these constituencies. These groups do not agree with the importance
he accords to the landless movement and other social movements.
They particularly deplore his administration's closeness to the
Cuban, Venezuelan, and other left-leaning governments in Latin
America, and a foreign policy which appears motivated more by
ideology than by economic and commercial interests. The left, for
its part, is frustrated with the government's failure to deliver on
its promise of new ideas. Where they hoped to see more jobs and
income for the poorest classes, Lula abandoned his party's platform
to follow the pro-market economic policies of his predecessor.


10. Ultimately, while Lula is not, and never will be, a favorite of
the business community, he is no longer seen as the threat to
economic stability that he once was. If his poll numbers continue to
improve as the electoral season progresses, he will likely attract
more business interests (and contributions) to his side. The more
likely it appears that he will win, the more companies will want to
jump on his bandwagon, and the less onerous his fund-raising
challenge will be.

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EXPECTATIONS FOR A LULA SECOND TERM
--------------


11. During the last several months of 2005, polls showed that Lula
could lose the election, and many speculated he might even decide
not to run. There was deep concern that, even if re-elected, he
would face an extremely difficult second term. His party was

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expected to be punished for corruption with a loss of Congressional
seats, and there was general disillusion with his government. More
recent polls, however, show him recovering his popular support, and
his government's approval ratings are returning to pre-scandal
levels. In part, this is due to recent positive economic figures.
The GoB is also heavily investing in advertising: the President is
announcing new social programs and investments (and trumpeting the
success of existing ones) almost every day, and appearing on major
network television every night (reftel).


12. Expectations for a Lula second term, should he win one, depends
how he wins the elections. There are three scenarios:

-- Lula could win but still find himself in a weak position, with no
strong political allies and a small cadre of PT deputies and
senators. In addition, he would face many difficulties, with little
maneuvering room in Congress and a hard time getting legislation
passed. He would be unable to attract high-quality people to his
cabinet. In such a situation, he could turn to the social movements
for support and begin to employ leftist rhetoric and populist
measures. Although unlikely, this is considered the most dangerous
scenario.

-- Lula could win by a large margin, with a working majority in the
Congress, mainly from centrist small parties and the large PMDB.
Since the PT isn't expected to do well in the congressional
elections, Lula would be dependent on other parties in his electoral
alliance. Still, the large margin could provide him with some
political capital and an ability to set an agenda and press for some
important reforms. One result would be a more centrist economic
policy, without large or disruptive changes.

-- Finally, there is a middle scenario, in which Lula wins but
without enough support to guarantee a comfortable majority in
Congress. In this case, his second term would be very similar to
his first one. Without a consistent majority, Lula would have to
negotiate the vote for each piece of legislation sent to the
Congress and deal with difficult deputies from his own party and
allied groups. Under this scenario, a change in economic course is
unlikely, as is a reform agenda. The business community fears this
eventuality, as it could lead to drift, deadlock, and stagnation.
Many observers believe this is the most likely scenario.

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THE PRIVATE SECTOR AND THE OPPOSITION TO LULA
--------------


13. The majority of the private sector feels comfortable with the
opposition PSDB because of its "neo-liberal" economic program.
However, there is no consensus about which PSDB candidate should
replace Lula. Sao Paulo governor Geraldo Alckmin is by far the
favorite among companies within the state. One major supporter is
Antonio Ermirio de Moraes, CEO of Votorantim Group, which owns
banks, cement firms, and other enterprises. FIESP President Paulo
Skaf has also expressed support for Alckmin as the PSDB's "natural
candidate." During his administration, Alckmin has worked closely
with the private sector and implemented some business-friendly
policies, including tax cuts. Accordingly, the local business
community knows and trusts him.


14. Sao Paulo Mayor Jose Serra, on the other hand, still carries
the stigma of being considered unpredictable and strong-willed. He
made enemies in the private sector while Health Minister under FHC.
Serra opened the market for generic medicines, harming traditional
pharmaceutical companies, and asserted Brazil's right to break
patents on some HIV medications. He also fought the tobacco
industry.


15. In the economic arena, Serra seems to be more to the left than
Alckmin - even more than Lula, say his opponents. During the FHC
administration, Serra was part of the so- called "developmentalist"
group of advisers in opposition to the "monetarist" group of Finance
Minister Pedro Malan and Central Bank President Arminio Fraga.

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Thus, he faces some opposition from the financial sector and from
some parts of industry, such as pharmaceuticals. At the same time,
he's considered very bright, well-educated, and determined. What
remains uncertain, and therefore a source of concern, is his
economic management and the direction of his policies.

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THE PRIVATE SECTOR AND THE PMDB
--------------


16. The centrist PMDB is well-connected to the private sector.
Most of its members in Congress were elected with help from one or
another industry. With no strong ideology, the PMDB could provide
the political balance for either Lula or Serra, if one of them were
to prevail in October.


17. The PMDB has two pre-candidates running for President - Anthony
Garotinho, former Governor of Rio de Janeiro, and Germano Rigotto,
Governor of Rio Grande do Sul. Garotinho is considered by many
business leaders to be a dangerous, populist candidate with strong
ties to evangelical churches, and a relative newcomer to the PMDB.
Rigotto is more mainstream but is unknown outside his own southern
state. However, if polls show Garotinho to be a viable candidate,
Rigotto could become the party's alternative to the former Rio
governor. The PMDB is expected to participate in the next
government one way or another, either with its own candidate or via
an alliance with either the PT or the PSDB. Even if the PMDB does
not make an alliance to enter the next government, the party is
expected to win enough seats in Congress to influence government
policy through its parliamentary power. Its presence in key Cabinet
posts would give the private sector confidence that radical changes
in financial and economic policy are unlikely. Historically, the
PMDB has kept the government in the center of the political
spectrum, reassuring the economic players. That's why both the PT
and the PSDB are willing to negotiate alliances for the second round
with the PMDB.

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COMMENT
--------------


18. Though we are still seven months from the election, the
campaign has in some respects already begun and is generating
attention. What is striking, however, is how little the opposition
pre-candidates have talked about policy - economic or any other -
and, when they do, how little their proposals differ from each
other. Everyone wants lower interest rates and more growth. Since
Lula's macroeconomic policy has been a continuation of FHC's
policies, the PSDB candidates haven't explained how they would
change or improve it, only that they would implement it better and
do a better job of fighting corruption. In the meantime, the PMDB,
which hopes to offer the voters a third way, an alternative to the
two main contending parties, has yet to say anything new. While
there is a consensus in the business community that the next
government needs to tackle long-standing and vexing problems - tax,
labor, and regulatory reform - there is little confidence in the
private sector that any new government (PT or PSDB) will have the
political will and clout to push through the necessary legislation.
End comment.


19. This cable was cleared/coordinated with Embassy Brasilia.

McMullen