Brazil: Domestic Demand Boosts Industry in First Half of 2006

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TAGS: ECON ELAB ETRD EFIN EIND BR
SUBJECT: Brazil: Domestic Demand Boosts Industry in First Half of 2006


SAO PAULO 00000880 001.5 OF 009



1. SUMMARY: Official data for the first half of 2006 suggest it
should be a relatively good year for Brazil's economy, although
less so than 2004. Slower global growth and the strong domestic
currency (the Real) are, according to analysts, beginning to slow
the growth of certain Brazilian exports. Inflation and
unemployment are expected to drop steadily throughout the year.
Falling interest rates and wage increases are boosting domestic
demand. The auto industry set new records in production and
exports in the first five months of 2006, but the appreciated
Real has reduced the profitability of exports, reducing planned
export levels and contributing to layoffs by some auto
manufacturers. The trade surplus narrowed as export growth
slowed and import growth accelerated. In national accounts,
investment inflows in the second quarter were lower than expected
due to turbulence in international financial markets. The
current account has been pressured by higher-than-expected
remittances of profits and dividends, in addition to higher
outflow for interest payments on external debt. End Summary.

SAO PAULO POSTED THE SECOND LOWEST INFLATION RATE OF SERIES


2. The Institute of Economic Research (FIPE) of the University of
Sao Paulo reported that consumer price inflation in Sao Paulo was
0.64 percent in the first four months of 2006, the second lowest
inflation rate it has ever recorded. Total inflation over a 12-
month period through April 2006 was 2.57 percent, the lowest rate
registered since the introduction of the Central Bank's
inflation-targeting monetary policy regime in 1999. FIPE said
that the pressure on the inflation index from inter-harvest
ethanol fuel price increases has eased, making ethanol fuel
consumption attractive again. FIPE noted that natural gas
prices, even were they to climb 50 percent, will not weigh
substantially in the inflation index, though it would be felt by
the consumer. Inflation in the month of April rose only 0.1
percent.


3. According to FIPE Research Coordinator Paulo Picchetti, a firm
adherence to inflation targeting and a strong exchange rate have
curtailed price pressures. With inflation largely under control,
FIPE revised downward, to 4 percent, its 2006 inflation rate to
remain at 4 percent in 2007. In May, the FIPE index posted
deflation of 0.22 percent, the largest decline since February

2000. Ethanol fuel prices declined for the second consecutive
month, easing pressure on the index from January. Food prices,
too, fell 0.89 percent for the 12th consecutive month. FIPE said
that the devaluation of the dollar and the need to pay debts has
led farmers to sell more produce domestically at bargain prices.
The highest declines were registered in the price of rice, down
4.57 percent; oranges, down 10.66 percent; and beans, down 6.68
percent. FIPE also reported that the market basket price fell
1.05 percent in May. Cumulative inflation in the first five
months of the year was 0.41 percent, and 1.97 percent in 12
months through May.


TABLE I
Monthly Consumer Price Inflation (CPI) in 2006: ? Sao Paulo

Year 2006 January February March April May
-------------- -------------- -------------- -------------- -------------- ---

(Percent change) 0.50 (0.03) 0.14 0.01 (0.22)

Source: FIPE
Consumer Price Inflation ? Sao Paulo
(Percent Change from April to May 2006)
Source: FIPE


--------------
Month April May
-------------- -------------- ---

SAO PAULO 00000880 002.2 OF 009


Transportation (0.04) (0.61)
Food Products (0.64) (0.89)
Rent (0.05) (0.01)
Personal Care Services 0.26 0.02
Clothing 1.01 0.39
Tuition Fees 0.13 0.10
Health Care 1.26 0.80
Source: FIPE

NATIONWIDE INFLATION AT ITS MILDEST PACE IN MANY YEARS


4. The Brazilian National Statistical Agency (IBGE) reported
that the inflation in consumer prices nationwide, as measured by
the National Broad Consumer Price Index (IPCA),slowed to 0.10
percent in May from 0.21 percent in April, driving the 12-month
inflation rate down to a 7-year low of 4.23 percent, which is
below the 4.5 percent target set by the Brazilian Central Bank
for 2006. IBGE noted that inflation was 0.49 for May 2005. The
decline of inflation in May was due primarily to an 11 percent
drop in ethanol fuel prices, which had been rising for months, as
well as to mild increases for medicine, clothing, electricity and
condominium fees. Overall, food prices declined slightly in May
compared to the previous month. Chicken and beef were the only
food products that posted an increase due to the resumption of
exports. IBGE revised downward to 4.5 percent its IPCA inflation
forecast for 2006, which is within the GOB inflation targeting
range introduced in 1999. A Sao Paulo economist reported that a
bumper agriculture crop and the positive impact of the exchange
rate are sustaining lower inflation levels.


5. Background note: The IPCA serves as the primary benchmark for
the GOB's inflation-targeting monetary policy. It records the
average of daily price variations in eleven major cities (Sao
Paulo, Rio de Janeiro, Porto Alegre, Belo Horizonte, Recife,
Belem, Fortaleza, Salvador, Curitiba, Brasilia, and Goiania). The
IPCA statistical sample includes families with incomes between
one and forty times the monthly minimum wage (i.e., up to
approximately USD 6,086 in May 2006).

SAO PAULO INDUSTRIAL PRODUCTION UP IN THE FIRST QUARTER


6. The Sao Paulo Industrial Activity Index (INA),maintained by
the Federation of Industries of the State of Sao Paulo (FIESP),
rose 8.6 percent in the first quarter compared to the same
quarter of 2005. Industrial activity in March rose 1.1 percent
versus March of 2005. FIESP Economic Department Director Paulo
Francini said that industrial output has surpassed all
projections. He credited increased exports for the industrial
output expansion and noted that vehicle, metalworking, and pulp
and cardboard sectors were operating at 90 percent, 88.7 percent,
and 91.4 percent of installed capacity, respectively. Real
industrial sales in the first quarter climbed 22.6 percent
compared to the same quarter of 2005, and hours worked rose 8.1
percent. According to FIESP, Sao Paulo state industry operated
at an average 81.8 percent capacity in the first quarter of this
year. FIESP predicted that current output capacity will be
exhausted in the next two to three years if industry output grows
at an average of 3.5 to 4 percent a year without new investment
to support the expansion.


7. In April, by contrast, the Industrial Activity Index (INA),
declined 1.4 percent from March but rose 4.8 percent in
comparison to April 2005. In the opening four months of 2006,
industrial production grew 7.6 percent. Overall, industrial
capacity utilization was 79.8 percent in April. Real sales rose
20.9 percent in the four months under review and were up 16.2
percent when comparing April 2006 to April 2005; however,
compared to March, real sales were down 10.3 percent. Hours
worked in production in April fell 3 percent versus March but
were up compared to a year ago. FIESP's Francini reinforced the
view that the industrial sector will continue moving forward in
the months ahead, notwithstanding still high interest rates. A

SAO PAULO 00000880 003.2 OF 009


private sector business representative in Sao Paulo told us that
the prospects for investment this year remain worrisome, given
the lagging impact of high interest rates and the effect of
current political uncertainties on business confidence. In fact,
he noted that surveys already show a significant reduction in
investment intentions in the steel, auto, and energy sectors.
Other sources report that Sao Paulo industry output is losing
steam and is not expected to grow more than 2 percent in the
first half of this year compared to the first half of 2005.
According to this source, paper and cardboard production will
grow 3.3 percent, machines and equipment 1.4 percent, and
electronic products 15 percent.

TABLE II
SELECTED FIESP DATA FOR THE FIRST QUARTER OF 2006


A. Industrial activity, hours worked and sales: Percentage
changes from previous year (data not seasonally adjusted):

Jan-March 2006
Jan-March 2005
- - - - - - -
Industrial Activity Level (1) 8.6
Hours worked in production 8.1
Real median salaries 9.0
Real Sales 22.6
Use of installed capacity 81.8


-- The activity level indicator (INA) is a composite of activity
indicators including real sales, employment, hours worked in
production, salaries, and capacity utilization. The INA index
does not measure industrial production per se.

SAO PAULO RETAIL SALES ROSE IN THE FIRST QUARTER


8. Retail sales in Sao Paulo in the first quarter of 2006
compared to the same quarter a year ago were up 2.4 percent,
according to data released by the Federation of Commerce of the
State of Sao Paulo (FCESP). March retail sales fell 2 percent
from the same month of 2005, interrupting a series of eight
consecutive months of growth in similar comparison. March 2006
compared to March 2005 showed the following positive results:
clothing, textiles and footwear were up 7.7 percent; toiletries,
up 7.2 percent; and auto parts, up 2.4 percent. Negative
performance was registered by household appliances and electronic
products, down 19.7 percent; furniture, down 3.7 percent; and
supermarkets sales, down 2.9 percent.

NATIONWIDE INDUSTRIAL OUTPUT UP IN THE FIRST QUARTER OF 2006


9. According to IBGE, Brazilian industrial output nationwide
grew 4.6 percent in the first quarter of 2006 compared to the
same quarter of previous year, and was up 1.2 percent versus the
immediately previous quarter, confirming the recovery begun in

2005. The growth of 4.6 percent in the first quarter in relation
to the same quarter of 2005 was driven by 19 of the 27 industrial
sectors. Mining, up 13.2, percent showed the biggest impact on
the overall index, propelled principally by the production of
iron ore and petroleum. Other relevant contributions came from
machines and information technology (IT) equipment, up 67.4
percent, reflecting a higher production of computers; and
electronics and communications equipment, up 21.7 percent, due to
higher production of TV sets and cellular telephones. Activities
with significant growth were electric machines and equipment, up
18.4 percent; pharmaceuticals, up 12.2 percent; tobacco, up 20.4
percent; and beverages, up 10.6 percent. On the other hand, the
eight sectors that posted declines were wood, down 7.1 percent,
and basic metallurgy, down 1.6 percent. The first quarter
results also showed accelerated increase in durable consumer
goods, which increased 14.9 percent, and capital goods, up 9.2
percent. Besides the 12.6 percent increase of auto production,

SAO PAULO 00000880 004.3 OF 009


cellular telephones production also expanded 31.3 percent, and
household appliances 13.9 percent.


10. In the capital goods sector, capital equipment production
for the energy sector rose 45.2 percent; capital equipment
production for construction expanded 21.4 percent; and capital
goods for mixed use were up 17.3 percent. The main negative
performance was of capital goods for the agricultural sector,
down 17.5 percent. In the same comparison, production of semi-
durable and non-durable consumer goods increased 4 percent,
remaining slightly below the 4.6 percent rate for the overall
industry. The major impact came from food products and
beverages, up 5.3 percent, followed by other non-durables, up 3.8
percent, stimulated by higher production of magazines and
medicines. It is worthwhile to note that fuels led by gasoline
increased 7.5 percent. On the other hand, negative pressure came
from semi-durables, down 1.8 percent, highlighted by leather
shoes and clothing, excluding cotton garments. Intermediate
goods expanded moderately, up 2.8 percent, pushed by the
production of industrial inputs, which climbed 16.7 percent, and
fuels and lubricants, up 13.9 percent, well above the average,
due to the good performance of iron and petroleum. The only
negative pressure came from industrialized foods and beverages,
down 5.9 percent, due to a drop in production of sugarcane by-
products. The production of packaging materials grew 1 percent
in the quarter under review, while construction materials rose
6.9 percent. In summary, the evolution of indices in the first
quarter of 2006 showed a positive scenario for Brazil's
industrial performance.



11. Industrial production remained stable in April from the
previous month after declining slightly in March. Compared to
April of 2005, industrial output fell 1.9 percent; however,
accumulated expansion was 2.9 percent in the first four months of
2006 versus the same period of 2005. Over a 12-month period
including April, cumulative growth was 6.2 percent. Of the 27
industrial sectors surveyed in April by IBGE, 19 posted expansion
compared to March, and 8 registered decreases. The outstanding
performance was that of business machines and informatics
equipment, up 52.2 percent, and petroleum refining and ethanol
fuel production, up 8.3 percent. On the negative side, the
largest pressures were from the pharmaceutical sector, down 11.4
percent, food products, down 6.9 percent and autos, down 6.2
percent. A business contact told us that industrial performance
in the months ahead is one of gradual increase.


12. Industrial production increased in March in 12 of the 14
principal Brazilian regions compared to March of 2005. Para
state outperformed the national average, clocking 17.5 percent
growth. Other states with growth include Ceara, up 12.3 percent;
Amazonas, up 8.5 percent; Minas Gerais, up 7.3 percent; Sao
Paulo, up 6.4 percent; Bahia, up 5.9 percent; Northeast Region,
up 4.6 percent, Pernambuco, up 3.9 percent; Espirito Santo, up 2
percent, Santa Catarina, up 1.7 percent; Rio de Janeiro, up 1.3
percent and Goias, up 0.1 percent. Meanwhile, industrial
production fell in Rio Grande do Sul, down 1 percent; and in
Parana, down 3.2 percent.


13. Overall, according to IBGE data released in the third week
of June, of the 14 areas surveyed, production remained stable in
April versus April 2005. Of 14 regions surveyed, 6 posted
growth, 6 registered declines and two showed no loss or gain.
Once more, Para topped the list with exceptional growth of 10.2
percent; Pernambuco was up 8.6 percent; Bahia, 5.2 percent;
Espirito Santo, 1.3 percent; Minas Gerais, 1.2 percent, and the
Northeast Region, 1.2 percent. Negative performance was reported
in Santa Catarina, down 10.2 percent; Amazonas, down 9 percent;
Rio Grande do Sul, down 8.9 percent, Parana, down 6.3 percent;
Goias, down 4.9 percent and Sao Paulo, down 1.2 percent. IBGE
said that two fewer working days in April were responsible for
the meager performance. Cumulative performance in the first four

SAO PAULO 00000880 005.4 OF 009


months of 2006 compared to the same period of 2005 showed that
the state of Para, which led with a growth of 12 percent, was
sustained by the extraction of iron ore.

NATIONWIDE RETAIL SALES BETTER THAN EXPECTED IN APRIL


14. According to IBGE, April retail sales posted an increase of
1.43 percent and the year-on-year growth rate increased 7.42
percent, consolidating reports of growth based on greater
domestic demand. Growth in the last twelve months including
April was 5.05 percent compared to the same period a year ago.
Six of the eight sectors surveyed by IBGE sold more in April than
in March of this year. Lower lending rates, higher family income
and increased credit facilities boosted consumer spending. The
outstanding performances were supermarket sales of food,
beverages, cigarettes, communications material and equipment,
computers and office equipment. Also, clothing sales helped the
recovery as winter sales gained steam in April. Durable goods
had a strong performance boosted by world cup related sales of TV
sets and DVD players. The fuels and lubricants sector was among
the few that posted a negative performance during the period.
Cumulative increase of retail sales in the first four months of
this year amounted to 5.64 percent, outstripping last year's 4.84
percent increase during the same period. IBGE believes that
retail trade has also benefited from declining interest rates,
higher minimum wages, better employment conditions and higher
fiscal spending.

SAO PAULO INDUSTRIAL EMPLOYMENT UP IN MAY


15. A survey by the Federation of Industries of the State of Sao
Paulo (FIESP) showed a 0.7 percent increase in Sao Paulo
industrial employment in May for a gain 15,000 jobs. Compared to
May of 2005, Sao Paulo industry generated 75,000 more jobs.
Despite a slower increase in the number of jobs generated in the
first five months of 2006, FIESP maintained its earlier
projections of a 4 percent increase of new jobs in 2006. FIESP'S
Economic Research Department Director, Paulo Francini, said that
the 0.70 percent hike in industrial employment was positive,
though modest given the 1.92 percent increase of April. He noted
that compared to May of 2005 the increase is already 3.6 percent
and that it would not be difficult to reach 4 percent growth this
year. Francini emphasized that conditions for increased
consumption are in place, supported by income expansion,
continued growth of credit facilities, a higher minimum salary,
increasing public expenditure and more public investments. He
also reinforced the view that consumption can increase in some
sectors but without a corresponding increase in domestic
production. "We can see this clearly in the footwear sector with
growing demand sustained by imports. In a nutshell, demand grows
and local production declines". In the survey of the 21
industrial associations consulted by FIESP, 7 fired workers, 11
hired workers and two reported no net gain or loss. The largest
number of dismissals occurred in the office equipment, furniture,
leather tanning and footwear industries. Most of the added
workers were in the ethanol fuel, food and beverages, transport
then equipment, coke, and petroleum refining industries.

COUNTRYWIDE INDUSTRIAL EMPLOYMENT UP IN APRIL


16. According to IBGE data, nationwide industrial employment was
up 0.6 percent in April compared to March, but fell 0.8 percent
compared to April of 2005. IBGE pointed out this is the eighth
consecutive negative result. Cumulative industrial employment in
the first four months of this year also was down 0.8 percent.
Industrial employment countrywide fell in April in 8 of 14 areas
surveyed compared to April of 2005. The state of Rio Grande do
Sul, down 9.3 percent, was the most affected due to cutback of
footwear and leather goods output, as well as the Northeast
Region. Over 12 months to April, industrial employment
nationwide fell 0.1 percent. Wages fell 0.7 percent in April
versus the previous month. This is the second consecutive month

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of drop in wage levels accumulating a contraction of 2.7 percent.
Confronting other indicators, workers' wages were up 2.2 percent
in the first four months of this year versus the same period of
2005, and up 2.2 percent in 12 months to April.

UNEMPLOYMENT STABLE IN GREATER SAO PAULO IN APRIL


17. The total unemployment rate in the greater Sao Paulo area,
calculated jointly by the Sao Paulo State Statistical Institute
(SEADE) and the Labor Union-Funded Statistical and Research
Center (DIEESE),remained stable at 16.9 percent compared to
March. The Sao Paulo metropolitan area had over 1,700,000
workers looking for jobs in April, compared to 1,659,000 workers
in March. The number of unemployed fell 5,000 in April, as the
22,000 new jobs created were not sufficient to absorb 27,000
workers who entered the labor market. (Note: The SEADE/DIEESE
index includes underemployed and discouraged workers and is
therefore higher than the open market rate measured by IBGE.
IBGE figures showed the unemployment rate for greater Sao Paulo
as 10.4 percent in April, the same rate as in March. End Note).
The SEADE/DIEESE data showed that the unemployment rate in the
metropolitan area of Sao Paulo has remained stable this year.


18. Greater Sao Paulo's economically active population in
December was estimated at 10,058,000 persons, up slightly from
10,031,000 persons in March and 10,100,000 in February.
Meanwhile, the number of persons employed in April was 8,358,000,
up 0.3 percent from March. Of those persons employed in April,
1.62 million were industrial workers; 1.28 million worked in
commerce/retail; 4.49 million were in the services sector; and
953,000 worked in other sectors including construction and
household services.


19. The SEADE/DIEESE workforce statistics reflected the following
performance by various sectors in April compared to March.

Job Generation/Loss by Sector April/06 thru
(Reported in thousands) March/06
- - - - - - - - - - - - - - -
Industry -13
Services 37
Civil construction/household help -05
Commerce Retail 03
(Source: SEADE/DIEESE)


(Note: The SEADE/DIEESE survey results differ from FIESP's
because SEADE/DIEESE limits its survey to the metropolitan area
of Sao Paulo; is conducted among 3,600 assorted households,
including self-employed and unregistered workers; and surveys
different households each month. FIESP's survey covers the state
of Sao Paulo; is limited to a fixed number of large industrial
firms, which are surveyed every month; and excludes self-employed
and unregistered workers. End Note).

NATIONALY UNEMPLOYMENT WAS STABLE IN APRIL AND MAY


20. According to a monthly survey carried out countrywide by
IBGE in the six largest metropolitan regions (Sao Paulo, Rio de
Janeiro, Porto Alegre, Belo Horizonte, Salvador and Recife),the
overall unemployment rate for these regions was estimated at 10.4
percent, and was stable compared to March (10.4 percent). In
relation to April 2005, the scenario was also of stability. By
areas, comparing April with March of this year, there was no
significant change in the six areas covered by the survey.
Compared to April of 2005, two metropolitan regions showed
changes: Unemployment in Recife rose from 13 percent to 16.5
percent, while Salvador fell from 17 percent to 13.4 percent.
Other regions were was stable. The average real income of
workers increased 0.4 percent and 4.7 percent compared to the
same month of 2005. Unemployment in the six metropolitan regions
fell 0.2 percentage points in May of this year compared April.

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Statistically, this variation does not make much difference, said
IBGE. The average real income increased 1.3 percent in May
compared to April, and 7.7 percent versus May 2005.

BRAZIL'S VEHICLE INDUSTRY SETS RECORD HIGH PRODUCTION AND EXPORTS
IN THE FIRST FIVE MONTHS OF 2006


21. According to the Brazilian Vehicle Manufacturers' Association
(ANFAVEA),auto manufacturers set new records in terms of
production and exports in the first five months of this year, up
6.1 percent and 8.6 percent, respectively, despite complaints
about the unfavorable exchange rate and the reason why Volkswagen
and General Motors have announced plans to cut back production
and fire workers. ANFAVEA also reported that production and
exports of vehicles were the highest for a month of May, up 20.1
percent and 16.7 percent. This is the all-time high for a month
of May since the auto industry began operations in Brazil. All
the same, ANFAVEA President Rogelio Golfarb said it has been
difficult for manufacturers to close new export contracts because
the exchange rate is still volatile. The sale of agricultural
machinery, harvesters and implements continued to slide due to
increasing production costs and heavy farm debt. He said that
over the past two years, the Brazilian currency has appreciated
more than 35 percent against the US dollar. He also said that
exports account for nearly 35 percent of overall production.
Golfarb defended a review of the exchange legislation with the
possibility for auto companies to use export resources to import
inputs without the need to bring the foreign currency into the
country.


22. According to an industry source, exports rose 16.7 percent
in May, totaling USD 1.06 billion. In April vehicle exports had
fallen 9.4 percent to 906,700 units compared to March.
Cumulative value of export sales of vehicles in the first five
months of this year amounted to USD 4.6 billion. Despite the 8.6
percent growth in the first four months, ANFAVEA maintained
projections of a 2.7 percent growth in 2006 in return for USD
11.5 billion. The same source reported that exports in the first
five months of 2005 had climbed 40 percent.


23. In May, the auto industry manufactured 245,200 units, up
20.1 percent compared to April. Domestic sales totaled 164,100
units, up 25.1 percent. In percentage terms, sales of flex-fuel
cars fell from 77.6 percent of total sales in the first quarter
but fell in May to 76.3 percent. ANFAVEA explained that ethanol
prices were too high recently, so many consumers stopped buying
flex-fuel cars; however, with more recent ethanol price
decreases, to about two-thirds the cost of gasoline, demand
should increase again.

GM AND VOLKSWAGEN ANNOUCE WORK FORCE AND EXPORT CUT DUE TO
DECLINING RECEIPTS

24. GM Brazil reported it is cutting approximately 960 jobs,
almost 10 percent of total work force at its principal car plant,
due to declining export sales. GM blamed the Brazilian
currency's sharp appreciation compared to the US dollar as the
main reason for the cut in work force. GM has offered a
retirement buyout plan to its employees. GM Vice President
Pinheiro Neto said that GM exported nearly 210,000 units in 2005
worth USD 1.6 billion. This year he expects exports to drop 20
to 30 percent. Also, the Brazilian subsidiary of Volkswagen
announced a plan to gradually cut labor costs by approximately 25
percent and exports by 40 percent, but that the cut of 25 percent
in workers' costs would not impose layoffs reaching 25 percent.
VW said the company may cut back on foreign sales by 100,000
units until 2008 due to the exchange rate. Exports account for
40 percent of VW's output in Brazil. Trade and Development
Minister Luiz Fernando Furlan reportedly said that the GOB is
considering lax law changes as well as ways and means to help the
auto industry maintain competitiveness in foreign markets.
According to the Metalworkers' Union in Sao Paulo, VW is planning
on firing nearly 6,000 workers.

SAO PAULO 00000880 008.4 OF 009



BRAZIL'S TRADE SURPLUS NARROWED IN THE MONTH OF MAY


25. Brazil's slowdown in exports and growth of imports cut the
country's trade surplus in May for the second month, the slowest
pace in almost three years. The trade surplus in May was down
12.2 percent to USD 3.02 billion versus the same month of 2005.
Total exports in May were USD 10.3 billion and imports 7.4
billion. The appreciation of the Brazilian currency, which has
gained around 25 percent versus the US dollar in the last two
years, has cut export demand of minerals, soybeans, manufactured
goods and other products. FIESP analysts said the cut in demand
will lead to a loss of momentum for exports in the coming months.


26. A Trade and Development Ministry source said the decline of
the US dollar versus the Brazilian Real provoked a 22 percent
hike in imports between January and May of this year. During
this period, foreign products worth USD 34 billion were imported
compared to USD 27.8 billion imported in the same period a year
ago. Armando Meziat, Secretary of the Ministry of Trade and
Development said that imports of industrial machinery and capital
goods are on the rise, an indication that Brazilian industries
are investing again. Although consumer goods? participation of
total imports is small, orders for imports of these products have
grown the most. From January to May of this year, imports of
consumer goods cost the country USD nearly one billion US
dollars, up 43 percent compared to the same period of 2005. Only
in May, imports of vehicles total USD 141 million, 165 percent
above figures for May of 2005. Meziat said that if necessary,
the GOB can implement measures to reduce the inflow of imports.
"If this happens to become a problem, there are mechanisms to
neutralize this problem", he said, citing the possibility of
hiking import tariffs on goods that can prejudice domestic
manufacturers. Cumulative surplus from January through May was
USD 15.4 billion, compared to USD 15.6 billion in the same period
of 2005. However, Meziat minimized the trade surplus decline,
saying it was expected by government authorities. He projected
exports to decline 8 percent compared to the 23 percent hike in

2005. He attributed the decline of exports as well as imports
due to a strike by Brazilian customs officers begun at the end of
April. This strike, he noted, is hampering entry and exit of
merchandize and is affecting the trade balance.


27. On the other hand, imports totaled USD 73.5 billion in 2005,
up 17.1 percent. All import categories reported increases:
capital goods rose 26.9 percent; consumer goods were up 23.7
percent; fuel and lubricants climbed 15.7 percent; and, raw
materials and intermediate goods posted 12.6 percent growth.
Import demand for raw materials and intermediate goods and
capital goods were the main items that increased total imports.

TABLE III
CUMULATIVE EXPORTS AND IMPORTS BETWEEN JANUARY AND MAY 2006 (IN
USD BILLION):

2006 Exports Imports Surplus
-------------- -------------- -------------- --------------
January 9.27 6.43 2.84
February 8.75 5.93 2.82
March 11.37 7.69 3.68
April 9.80 6.70 3.10
May 10.28 7.25 3.02

Source: Ministry of Trade and Development (MT&D)

BRAZIL'S FDI TOTALED 6.32 BILLION IN THE FIRST FIVE MONTHS;
FORECAST PREDICTS REDUCED FDI INFLOW IN 2006


28. The Brazilian Central Bank said that turbulence in
international financial markets is causing harm to the country's
external accounts. The Chief of the Brazilian Central Bank's
Economic Studies Department (DEPEC),Altamir Lopes, forecast a

SAO PAULO 00000880 009.2 OF 009


slim FDI inflow in June of not more than USD 500 million.
Despite weak inflow of FDI this year, Lopes said that DEPEC
maintained its earlier projection of USD 18 billion FDI inflow
this year given significant improvement of international
financial markets. In May, inflow of FDI was USD 1.58 billion,
and in the first five months USD 6.32 billion, a monthly average
of USD 1.26 billion.

BRAZIL CURRENT ACCOUNT SURPLUS UP IN MAY



29. According to data released by the Brazilian Central Bank,
the current account surplus increased in May to USD 475 million
from USD 241 million in April. Brazilian Central Bank
authorities said the May surplus was in line with expectations.
The current account surplus diminished about 20 percent in May
compared to May of 2005. However, higher remittances were
responsible for the pressure on the account. Sao Paulo financial
market analysts reported that the reduced current account surplus
is likely to reflect the expectation of increased pressure from
remittances of profits and dividends, in addition to a higher
outflow of interest payments in the coming months.


30. This message was coordinated with Embassy Brasilia.

MCMULLEN