BRAZIL'S BUSINESS OUTLOOK FOR 2009 NOT GOOD

UNCLAS SECTION 01 OF 03 SAO PAULO 000680

SIPDIS
SENSITIVE

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK, BONEILL

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD BR
SUBJECT: BRAZIL'S BUSINESS OUTLOOK FOR 2009 NOT GOOD

SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY


1. (SBU) Summary: Despite Brazil's impressive September economic
performance, most of the domestic indicators show that 2009 will be
a difficult year. Contacts across Brazilian business sectors told
the Consul General that they are preparing for difficult times in

2009. Early indicators of consumer goods sales and industrial
production point to softening fourth quarter growth and indicate a
slide into a much weaker 2009 economic performance. In particular,
the auto industry has been hard hit in Brazil. This will
reverberate back to the United States as Brazilian auto sales had
led profitability indicators for many U.S. auto manufacturers.
Consensus expectations for Brazilian economic indicators are rapidly
declining, with GDP growth in 2009 expected at only 2.5 percent
compared with 5.7 percent in 2007 and an expected 6 percent in 2008.
With tax revenues declining due to slumping production and slowing
consumption, the GOB will need to balance fiscal stimulus measures
to boost the economy while keeping overall spending under control.
End Summary.

Growth On Track Through September
--------------


2. (U) The Brazilian economy had a record performance in the third
quarter, with growth up 6.8 percent over the same period in 2007.
With the most recent numbers, Brazil is on the path for
approximately six percent GDP growth in 2008. Private consumption,
investments, and government expenditures were the drivers for this
impressive jump in GDP. Domestic demand contributed about 10
percentage points to the overall output growth, while net exports
again were a negative drain on the economy of nearly three
percentage points.

But Will Not Continue
--------------


3. (U) Despite the surprisingly positive numbers through September,
most of the indicators for domestic performance suggest this trend
will not continue into the last quarter. October retail sales
plummeted, down eight percent from September. Vehicle sales alone
are down 25 percent from November 2007 numbers and consumption and
energy usage are showing anemic, marginal growth. At the same time
that domestic production and consumption have decreased, private
investment is showing signs of weakening because of declining
business confidence and a lack of liquidity from both domestic and
international sources. Indeed, foreign direct investment in
November was down 14 percent from last year.


4. (SBU) In a recent meeting with the Consul General, several Sao
Paulo business leaders underscored the "doom and gloom" ahead
despite the record third quarter growth. Motorola executives told
the CG that they were expecting a grim 2009. The currency
depreciation has shocked them and they were forced to sacrifice
their margins. Despite this, they still expect a five to 10 percent
drop in cell phone sales in Latin America for 2009. GE said that
the company's longer production cycle has helped their performance,
but they expect a slowdown in late 2009. Caterpillar, though still
positive, believes tough times are ahead. Orders are down 15
percent for 2009 across business units, and it has modified its
budget to include a higher exchange rate of 2.38 Reals to the USD.
The depreciation of the Real has made their export business more
attractive and they expect significant increases in export of heavy
machinery for 2009. 3M said that its auto parts division was
starting to show signs of weakness, but that overall sales were up
20 percent over last year.


5. (SBU) Sectors that include basic goods have not yet seen the
effects of the crisis, but told the CG they expect a slowdown by
mid-2009. Colgate said that its sales so far have been positive or
stable. International Paper had record sales in October due to
school supplies and that 2008 sales were up by five percent.
Despite this, investments in paper are being postponed and demand
for pulp is down significantly. U.S. sales are down six percent in
the fourth quarter over last year. Eli Lilly said its sales had
been strong because the GOB was concerned about the health budget
and had been building inventory in its high-end products.

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6. (U) Even the large Brazilian multinationals have started showing
signs of weakness. Brazilian industrial production in October slid
1.7 percent compared to September, and Itau Bank estimates November
numbers will be down some five percent over last year. Embraer
announced it would cut new aircraft deliveries from 315 to 270 units
in 2009. Company officials refuted press reports that it is
preparing to fire 4,000 employees, but did not rule out possible
workforce cuts. One of Embraer's suppliers, Grauna Aerospace,
manufacturer of precision parts, let go 10 percent of its 500
employees last week. Vale cut 2.1 percent of its workforce because
of slumping global demand, five weeks after announcing a nine
percent iron ore production cut. In a survey conducted November 6
to 14 by the National Chamber of Industries (CNI),88 percent of
Brazilian industrial firms surveyed responded that the global
economic crisis is starting to directly affect their businesses.
The most significant effect is a decline in demand, followed by
higher machine costs, and tighter credit conditions. Seventy-one
percent of firms reported that they have already reduced their 2009
investment budgets. Forty-nine percent of firms believe the
economic crisis will be fully resolved in 2009, while 40 percent
believe it will continue until 2010.

U.S. Automakers Hit Hard
--------------


7. (U) The effects of the crisis are clearly being felt strongly in
the auto sector. After the three big U.S. auto manufacturers
redoubled efforts to ramp up production in Brazil, adding extra
shifts, thousands of workers, and millions of dollars in new
investments in 2007 and 2008, production has slowed sharply. As
credit for auto loans dried up in October, it became more expensive
to secure auto loans. Dealers that previously offered six-year
financing with no down payment are now asking for 50 percent down
and financing over a two-year period. Ivan Favarin, a sales manager
at a GM dealership in a middle-class neighborhood of Sao Paulo said
that the uncertainty about the future economic situation has reduced
demand for new cars as well. (Note: The GOB recently moved to
reduce and in some cases eliminate certain industrial product excise
taxes including for vehicles in an effort to spur consumption. Post
will monitor this as it develops and report septel concerning its
impacts. End Note.) Manufacturers have put many of their workers
on mandatory vacation to idle assembly lines as stocks of unsold new
cars began climbing. Layoffs are also in the works as Volvo, a Ford
subsidiary, became the first to announce layoffs, cutting 430
workers from a plant in Curitiba, about 18 percent of its workforce
in Brazil. GM has started offering new retirement incentives as
well.

Comment
--------------


8. (SBU) The effects of the global financial crisis are starting
to permeate the Brazilian business community as even those sectors
thought to be relatively immune from the crisis are showing signs of
weakening demand. Consensus expectations in Brazil are rapidly
declining across all indicators. Despite the consensus GDP growth
of 5.2 percent (and perhaps up to six percent) this year, the
financial community is preparing for a rapid deceleration in GDP
growth to some 2.5 percent next year. Fourth quarter data in Brazil
is likely to show the more pronounced effects of the crisis and will
begin to clarify the impacts of the crisis for Brazil's economy
going into 2009. Government receipts are already slowing due to
slumping production and demand. With lower GDP growth expected next
year, the GOB will have to tighten the purse strings to keep its
fiscal accounts in order or move the target for the primary surplus.
The Central Bank will face enormous pressure to cut interest rates
January 20 when the year-end economic indicators start to show a
real economic decline. (Note: The Central Bank kept interest rates
steady at 13.75 percent on December 10 largely due to concerns over
inflation, but foreshadowed cuts in January that many expect could
be as great as 0.75 percentage points. End Note.) Though Brazil is
well positioned to fight off the crisis due to large international
reserves (including USD 150 billion in U.S. Treasury bills-the
world's fourth largest holder of these instruments) and relatively
more liquid banking sector, all indicators are predicting a

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difficult year in 2009. On the political front, the Lula
Administration will have to fight to shield itself from blame and
the opposition parties appear to be gearing up to do just that. End
Comment.


9. (U) This cable was coordinated/cleared by Embassy Brasilia and
the U.S. Treasury Financial Attach in Sao Paulo.

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