BRAZIL: PRIVATE SECTOR AND CENTRAL BANK DISCUSS BILAT

UNCLAS SECTION 01 OF 02 SAO PAULO 000367

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN SENV BR

SUBJECT: BRAZIL: PRIVATE SECTOR AND CENTRAL BANK DISCUSS BILAT
RELATIONS, REFORMS, OPPORTUNITIES WITH DEPUTY NATIONAL SECURITY
ADVISOR MICHAEL FROMAN, JUNE 19

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY


1. (SBU) Summary: The U.S.-Brazil bilateral relationship is
probably at a multi-decade high, thanks in part to institutions like
the CEO Forum, which provide a flexible vehicle for the business
sector to move the relationship forward, according to Sao Paulo
private sector and Central Bank interlocutors who met with DNSA
Michael Froman on June 19. They also told him that Brazil should be
one of the first countries to emerge from the ongoing global
economic crisis, though the next GOB administration still faces
important pending reforms in both the economic and political arenas.
China is now Brazil's number one trade partner, but also an
economic competitor. According to former Brazilian Ambassador to
the U.S. Sergio Amaral, Brazilian stabilization forces have
performed brilliantly in Haiti, showing that the GOB has assets that
it can bring to the table in resolving thorny international issues.
End Summary.


2. (U) Deputy National Security Advisor for International Economic
Affairs Michael Froman exchanged views with various private sector
interlocutors and Central Bank Director in Sao Paulo on June 19.
During his visit, Froman met with Sao Paulo Federation of Industries
(FIESP) representatives Mario Marconini, Frederico Arana Meira,
Thomas Zanotto, and UNICA representative Carolina Costa. He also
met with Coteminas President and CEO Forum Brazil co-chair Josue
Gomes da Silva, Brazilian Central Bank Deputy Governor for Economic
Policy Mario Mesquita and former Brazilian Ambassador to the U.S.
and private consultant Sergio Amaral. Several themes dominated the
conversations:

The U.S. Relationship is Good and Getting Better


3. (U) All those interviewed described U.S.-Brazil bilateral
relations in glowing terms. FIESP's Marconini talked about how the
Brazilian business class had, in recent years, moved away from a
defensive, protectionist view of the U.S. and had adopted a positive
attitude toward engagement. Marconini cited FIESP President Paulo
Skaf's planned upcoming trade mission to the U.S. as evidence of the
eagerness of the Brazilian business class to engage. Ambassador
Amaral discussed how a variety of factors -- the Lula's government's
move away from a leftist-ideological foreign policy in its second
term, President Obama's popularity and, above all, Brazil's growing
independence from the U.S. -- all fostered greater self-confidence
in Brazil and more willingness to work with the U.S. Marconini
noted that in recent WTO Doha Round trade negotiations, the U.S. and
Brazil positions had converged, moving the countries toward
partnership promoting more open trade. He added that right now,
while the world is in the grip of a global economic crisis, both
Washington and Brasilia must work to fight rising protectionist
pressures.


4. (U) One key element that various interlocutors cited in
improving the U.S.-Brazil relationship was the development of new
mechanisms for cooperation. In this connection, the CEO Forum came
in for special praise as a breakthrough initiative. As Josue Gomes
da Silva described it, the Forum allows the private sector to set a
faster, more forward moving agenda, even when government
bureaucracies are inclined to move more slowly. He saw
possibilities for the Forum to continue to push cooperation in key
areas, including negotiations for a bilateral tax treaty, a possible
U.S.-Brazil agreement to import duty free products with value added
from Haiti (a new idea),and increased energy cooperation.
Ambassador Amaral also mentioned Haiti, stating that the Brazil U.N.
Stabilization Force there had performed brilliantly in a clear
demonstration that the GOB can now take on an enhanced international
role in this type of operation.

Brazil Strongly Positioned


5. (U) The majority of those interviewed saw Brazil as well
positioned to become one of the first countries to emerge from the
global economic recession. Central Bank Deputy Governor Mario
Mesquita said that the Brazilian banking sector was in a strong
position. Small banks have stabilized and the big banks are in an
excellent financial position. Both Marconini and Gomes da Silva
cited Brazil's strong fiscal position.


6. (U) Marconini observed that the ongoing crisis had turned
Brazilian economic vices into virtues. In his view, the Brazilian
interest rates are too high, bank spreads too wide, and trade as a
percentage of GDP is too low. Nonetheless, Marconini noted, all

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these elements had served to insulate Brazil from the ongoing
economic turmoil.


7. (SBU) Ambassador Amaral was the lone dissenter from this
generally optimistic view of Brazil's post-crisis prospects. Amaral
argued that the global recession had only begun to hit Brazil,
striking first the export-sensitive sectors, but that now it was
spreading into the economy more generally. The government has
already taken the easiest measures to stimulate the economy. Amaral
predicted that the ongoing downturn would eventually cut into tax
revenues, force higher government spending and undermine President
Lula's sky-high popularity. (Comment: Amaral is a close advisor to
Sao Paulo State Governor and leading contender for the PSDB
nomination Jose Serra. PSDB observers in general have been more
pessimistic on the economy, arguing that the ongoing recession could
work to Serra's advantage in the campaign. Amaral is said to be a
candidate for Foreign Minister in a possible future Serra
Administration. End Comment.)

But Challenges Remain


8. (U) While all interlocutors were basically bullish on Brazil, a
number of them cited key areas that need reform. Marconini, for
example, argued that when the recession eases, Brazil will need to
work hard to reduce taxes, bank spreads, and interest rates,
particularly if it is to compete with countries like China. In this
connection, Mario Mesquita complained that while China is now
Brazil's largest foreign trade partner, trade between the two
countries follows an "old fashioned" commodities-based pattern and
does not stimulate the production of value-added goods in Brazil.


9. (U) Mesquita, though convinced of the stability of the banking
sector, said that it, too, needed to change. He observed that large
Brazilian banks, accustomed to making safe, high-interest/high
profit loans to the GOB are only slowly opening up their lending to
private borrowers in the business sector. The GOB also needs to
invest heavily in infrastructure, he said. Ambassador Amaral
lamented that Brazil is not more forward-looking on the environment.
He observed that green technologies constituted a lucrative future
market, but thought that Brazilian hostility to environmentalists,
driven by agricultural interests and a "defensive" stance on the
Amazon rainforest, had blinded too many Brazilians to the
opportunities offered by this new market.


10. (U) Mario Marconini argued that political reforms must
accompany economic changes. There are too many ministries in
Brasilia (34) and too many political parties (over 30),a situation
that makes it difficult for even an extremely popular President like
Lula to enact a comprehensive change agenda.


11. (SBU) Comment: These key contacts welcomed DNSA Froman's visit
as continued evidence of high-level USG interest in Brazil. They,
in turn, demonstrated Brazil's increasingly confident engagement and
willingness to partner with the United States on the range of
bilateral, regional, and international issues. End Comment.


12. (U) This cable was coordinated/cleared with Embassy Brasilia
and DNSA Froman's office.

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