Identifier
Created
Classification
Origin
06SAOPAULO454
2006-05-02 18:20:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Sao Paulo
Cable title:  

TREASURY A/S LOWERY MEETS WITH SAO PAULO CONTACTS

Tags:  ECON EFIN PGOV PREL BR 
pdf how-to read a cable
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FM AMCONSUL SAO PAULO
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INFO RUEHRG/AMCONSUL RECIFE 2881
RUEHRI/AMCONSUL RIO DE JANEIRO 7039
RUEHBR/AMEMBASSY BRASILIA 6083
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UNCLAS SECTION 01 OF 04 SAO PAULO 000454 

SIPDIS

SENSITIVE
SIPDIS

NSC FOR CRONIN
TREASURY FOR OASIA - DAS LEE, FPARODI
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/SHUPKA
STATE PASS USAID FOR LAC

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: TREASURY A/S LOWERY MEETS WITH SAO PAULO CONTACTS

REF: BRASILIA 665

UNCLAS SECTION 01 OF 04 SAO PAULO 000454

SIPDIS

SENSITIVE
SIPDIS

NSC FOR CRONIN
TREASURY FOR OASIA - DAS LEE, FPARODI
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/SHUPKA
STATE PASS USAID FOR LAC

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: TREASURY A/S LOWERY MEETS WITH SAO PAULO CONTACTS

REF: BRASILIA 665


1. (SBU) Summary: Treasury A/S Clay Lowery's interlocutors during an
April 4 Sao Paulo visit pointed to problems obtaining financing and
skilled labor, along with the high and complicated taxes, as
hindering the development of Small and Medium Enterprises (SMEs). A
round-table with recipients of conditional cash transfer programs
highlighted the value of such programs in helping parents to keep
their children in school. The chief economists of several banks
expressed confidence in Brazil's macroeconomic scenario and the
direction of macroeconomic policy, although all see the
microeconomic agenda lagging. U.S. businesses enumerated
education, job creation and labor reform, tax reform, Intellectual
Property Rights (IPR) protection and the need for trade agreements
as their priorities for policy engagement with the GoB.
Participants in a roundtable on infrastructure investment
highlighted regulatory uncertainty, particularly environmental
licensing as a principal obstacle to infrastructure investments in
Brazil. End Summary.


2. (U) Background: Treasury A/S Clay Lowery met in Sao Paulo on
April 4 with representatives of U.S. businesses, infrastructure
investors, the Brazilian Banking Association (FEBRABAN) and had a
round table discussion on financing for Small and Medium Enterprises
(SMEs). Lowery visited Cidade Tiradentes, a low-income neighborhood
in Sao Paulo, where he met with regional Vice-Mayor Arthur Xavier
and discussed social and economic development problems with several
beneficiaries of GoB conditional income transfer programs. Lowery
also delivered a speech on poverty at the Sao Paulo branch of the
Fundacao Getulio Vargas (FGV),a leading research institution.
Lowery's delegation included Treasury DAS Nancy Lee, Western
Hemisphere Office Director Ramin Toloui and deputy director Chris
Kushlis. Consul General McMullen and DPO David Wolfe rounded out

the USG delegation. Lowery noted to all his interlocutors that he
had come to Brazil for the annual Inter-American Development Bank
(IDB) meetings and was making use of the opportunity to get a deeper
understanding the challenges of dealing with poverty in Brazil, the
state of the Brazilian economy, infrastructure issues and U.S.
business concerns. End Background.

SME Challenges: Finance, Skilled Labor, Informality
-------------- --------------


3. (U) Lowery's interlocutors made two principal points on the
challenges facing Brazilian SMEs: the difficulty of gaining access
to finance and problems finding skilled labor. Cidade Tiradentes
roundtable participant Cicero Ferreira da Silva, owner of a video
rental store that has grown to seven area outlets, complained of the
lack of skilled labor available for hire in the area. This meant
that his business assumed substantial training costs; Silva is
investing in further developing his work force by paying for several
workers to take college-level courses. Cibele Angela Miranda, who
runs a small business that makes stamps, toys and educational
materials, reinforced this point, noting that her business routinely
faces problems finding skilled labor in the area. One source of
labor was the Tiradentes municipality's vocational training program
which provided laborers with some basic skills; this made it easier
for these new hires to pick up job-specific skills.


4. (SBU) Tiradentes roundtable participants uniformly singled out
the difficulty in accessing finance as a significant recurring
problem for their SMEs. Silva noted his ongoing negotiations with
his bank for the financing to open his seventh video rental outlet
already had taken several months. Asked about financing from the
National Economic and Social Development Bank (BNDES),the
roundtable participants said that only large firms were able to
obtain low-cost BNDES loans. Separately, FEBRABAN Chief Economist
Luis Troster downplayed BNDES's role in SME finance, noting that 90%
of its lending is to large corporations. He derided BNDES as an
example of a regressive income-distribution program, since it draws
its funding from a payroll tax (i.e. primarily from the working
class) and does almost all its lending to larger, successful
companies. ABN Amro representative Cesar Goncalves stated that
government borrowing crowded out lending to SMEs by private banks.
Goncalves noted that while there had been large credit growth over

SAO PAULO 00000454 002 OF 004


the last two years, including of the smallest size loans, most of
this growth was in consumer lending, not SME financing.


5. (SBU) Luiz Pedutti, the Chief Executive of WAPPA, a Brazilian
software startup that is currently drawing its financing from the
limited venture capital market in Brazil, blamed the high level of
informality among small businesses on the complex tax structure.
Beyond the issue of high tax rates, even a reasonably well-financed
and well-run business like his own, he said, had difficulty
fulfilling the complicated tax filing requirements. Marcelo Toledo,
an economist at leading Brazilian bank Bradesco, echoed this
assessment at the FEBRABAN lunch. Toledo argued to Lowery that the
GoB must sequence its reform efforts, first tackling government
current expenditures, a sine qua non for tax reform, which would in
turn begin to address the problem of informality.

Dealing with Poverty - Income Transfer Programs
-------------- --


6. (U) Tiradentes Vice Mayor Xavier held a round-table with
municipally employed social workers and beneficiaries of conditional
income transfer programs. One of these credited the 40 Reais (about
US$19) per month that she received from a program for the prevention
of child labor (PETI - Programa de Erradicacao do Trabalho Infantil)
for allowing her to keep her daughter in school. Her daughter also
was able to access municipally-sponsored after-school programs.
Another mother said that PET and the complementary municipal
after-school programs were helping keep her son of the streets.
This was important, since the 2.5 hour commute to work in Sao Paulo
meant she was unable to provide after-school care. Janete Santos, a
municipal social worker, stated that they municipality targets the
2,000 most vulnerable families in this low income district, ensuring
they get access to those programs that are available. A/S Lowery
assured the round-table participants that poverty reduction,
including through institutions such as the IDB was a USG priority
and thanked them for the opportunity to learn from their
experiences.

Bankers: Macroeconomic Scenario Good
--------------


7. (SBU) Over lunch hosted by FEBRABAN, chief economists of several
banks told A/S Lowery that the macroeconomic situation was good
(reftel). There was unanimity of opinion that President Lula would
continue the same broad macroeconomic policy stance, despite having
been forced to replace Finance Minister Antonio Palocci with BNDES
President Guido Mantega. Alexandre Bassoli of HSBC stated that the
external balance had been an anchor for the economy, with strong
exports (export prices up 40% over 2002). Andre Loes of Banco
Santander added that structural changes also had contributed to
export performance, including targeted tax measures, a new awareness
by business of the importance of exports, and Brazil's shift to
being a net oil exporter as of this year. Bassoli added that the
Lula administration deserved credit for improving debt dynamics,
which were no longer hostage to the exchange rate.


8. (SBU) Bassoli argued that inflation was still volatile, having
gone from 12.5% in 2002 to about 5% now (based on a rolling 12 month
estimate),thus creating an interest rate premium. He further noted
that disinflation since 2003 had been largely based on the exchange
rate appreciation, which had restrained the prices of tradable
goods. Although there might be a few changes in the personnel at
the Central Bank, Bassoli did not expect any variations in monetary
policy. (Note: On April 6 the Central Bank announced that two of
its directors, Alexandre Scwhartsman and Sergio Darcy, would be
leaving, to be replaced by Mario Mesquita, chief economist of ABN
Amro and Paulo Viera da Cunha from HSBC Securities New York office.
Most analysts believe the new directors will not change the bank's
orthodox stance.)


9. (SBU) The biggest challenges facing Brazil right now, regardless
of who wins the October election, affirmed Andre Loes, are the
quality of the fiscal adjustment and the need for microeconomic
reform. Brazil had achieved high primary surpluses, he explained,
despite substantial growth in current expenditures, because revenue

SAO PAULO 00000454 003 OF 004


growth has been even stronger. This increasing tax burden, coupled
with the complexity of the tax system, was a growing constraint for
the economy and reduced potential growth. While new Finance
Minister Mantega is expected to meet, although not exceed, the
formal 4.25% of GDP primary surplus target, there is more concern
about his ability to reign in primary expenditures, said Jose Pena
Garcia of BankBoston. Pena Garcia also expressed concern about
Lula's ability to push for microeconomic reforms, necessary to boost
growth rates, during a potential second Lula administration.
Leading opposition presidential candidate Geraldo Alckmin likely
would pursue the microeconomic reform agenda more vigorously, Pena
Garcia argued.

Amcham Concerns
--------------


10. (SBU) In a morning session with leaders the American Chamber of
Commerce (Amcham),Mickey Peters of Duke Energy outlined to A/S
Lowery U.S. business concerns and priorities. Peters enumerated
education, job creation and labor reform, tax reform, Intellectual
Property Rights (IPR) protection and the need for trade agreements
as the main Amcham concerns. Elucidating on educational issues, Jim
Whitaker of Intel highlighted problems with exclusion of certain
societal sectors as well as lack of standards and transparency. The
Amcham, he said, has a program to collect and disseminate best
practices. Intel Capital, according to Whitaker, was investing $50
million in technology startups in Brazil. Maria Fernanda Teixeira,
(Formerly of EDS),noted that development of SMEs, tax reform,
reduction of the infrastructure gap and improvements to the
investment climate all played into the question of job creation.
FGV researcher Paulo Figueiredo advocated addressing exclusion
issues by asking firms to give preferences in contracting to SMEs
owned by members of Brazil's excluded classes.


11. (SBU) The Amcham has lobbied both the GoB and USG hard to try to
advance the WTO Doha Round (DDA) and Free Trade Area of the Americas
(FTAA) process, according to Simone Aguiar, Amcham trade committee
head and Latin American Director for JP Morgan Chase Vastera.
Brazil and Mercosul were, de facto, being excluded from the web of
bilateral FTA that the USG was advancing. He urged that the USG
make a few conciliatory gestures to Brazil, which would help
maintain close coordination in the DDA and potentially open the way
for renewed FTAA discussions. A/S Lowery noted that the USG has put
a very aggressive agriculture offer on the table at DDA, which the
EU has resisted. Brazil and the G-20, however, were reluctant to
move as far as the USG and EU sought on services and
non-agricultural market access (NAMA),complicating negotiations.
But there was a desire from the agricultural committees in the U.S.
Congress to complete an ambitious agricultural round, Lowery said,
which created an opportunity that should not be wasted.

Infrastructure: Regulatory Uncertainty
--------------


12. (SBU) Participants in a roundtable on infrastructure investment
highlighted regulatory uncertainty as a principal obstacle to
infrastructure investments in Brazil. GE's Alexandre Silva and Duke
Energy's Mickey Peters pointed out that the regulatory agencies were
under-funded and lacked qualified personnel. Alvaro Novas of major
Brazilian construction firm Odebrecht suggested that the IDB make
the establishment of professional regulatory institutions a
condition for its infrastructure lending. Novas applauded the new
IDB infrastructure fund, although he noted working with
sometimes-inflexible multilateral institutions could be difficult.
Novas and Sao Paulo State Secretary of Transportation Director of
Planning Milton Xavier noted the concession law for infrastructure
projects (most notably roads) functioned well. The project finance
framework was problematic, however, because of a problem with the
rules for accounting for project debt on individual company balance
sheets.


13. (SBU) The environmental licensing problem came in for uniform
criticism. Novas and Peters of Duke Energy noted that environmental
licensing for a project could take as long as 4 years. The Public
Ministry (akin to the attorney general's office) complicated the

SAO PAULO 00000454 004 OF 004


process tremendously, Novas said, by seeking injunctions halting the
environmental licensing process without solid justification, Novas
said. He warned that Brazil might face an energy shortage in 2008
or 2009 should several hydropower plants still awaiting
environmental licensing not begin construction quickly.


14. (SBU) Eduardo Nishi, a lawyer who has focused on legislation
creating the framework for Public-Private Partnerships (PPPs) in
infrastructure investments, noted that the federal government has
yet to put out for bids its first PPP project, despite the GoB's
early hyping of PPPs. The law contained some innovations, for
example allowing disputes to be settled by arbitration, but
implementation has been slow. Although some states have moved to
regulate state-level PPPs with more alacrity, they face financial
limitations which limit their ability to finance their portions of
PPPs, said Nishi.


15. (U) During his day in Sao Paulo Assistant Secretary Lowery
delivered a speech a on the importance the Bush Administration
attaches to poverty reduction in the hemisphere and what lessons can
be drawn from global experience. Lowery emphasized that countries
that have successfully reduced poverty have all grown rapidly,
maintained low inflation and sustainable public finances and pursued
microeconomic reforms that spread opportunity, including opening
markets, reducing barriers to starting a business, investing in
health and education, and linking the poor to markets through
infrastructure, strengthened property rights and increasing access
to capital. In Latin America, the record on poverty reduction has
been weak, with the exception of some countries such as Chile,
Mexico, Costa Rica and Brazil. Finally, Assistant Secretary Lowery
outlined the US priorities for the region, including debt relief for
the poorest countries, expanding IDB lending to the private sector,
tripling credit to small and medium sized enterprises, halving the
cost of remittances, catalyzing private infrastructure investment,
supporting the millenium challenge account programs and advancing
our free trade agenda.

16. (U) This cable was cleared by Treasury and Embassy Brasilia.
MCMULLEN