BRAZIL: PRIVATE SECTOR VIEWS OF THE BRAZILIAN ECONOMY OVER

UNCLAS SAO PAULO 000044 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV BR SUBJECT: BRAZIL: PRIVATE SECTOR VIEWS OF THE BRAZILIAN ECONOMY OVER THE NEXT 10 YEARS REF: 09 SAO PAULO 630; SAO PAULO 18; BRASILIA 1354 ¶1. (SBU) Summary: Emerging from the global economic crisis, private sector leaders are generally confident that Brazil's economy will continue to grow over the next decade based on strong investment opportunities, stable macroeconomic policies, and favorable demographic and external factors. Nevertheless, uncertainty remains as to whether the economy may overheat in the next few years and, over the longer term, if it will grow at levels high enough to significantly reduce remaining poverty and income inequality. Most analysts agree that in order for Brazil to achieve such sustained growth, the next GOB administration must pass pending economic reforms in areas such as taxes, labor, and infrastructure. End Summary. Investment Opportunities and Domestic Demand to Spur Growth -------------- -------------- ¶2. (SBU) Leading Brazilian bank Itau Unibanco estimates that the Brazilian economy is likely to grow over the next decade at an average of 4.5 percent annually. The main drivers for this growth include a significant boost in expected investment in areas such as energy, including the offshore pre-salt oil development anticipated through 2025, and public infrastructure. According to Mauricio Oreng, economic analyst at Itau, private research suggests that investment in the pre-salt oil fields will exceed $55 billion over the next ten years. Likewise, research institutions such as Fundacao Getulio Vargas predict continued strong demand from a growing domestic sector and Brazilian middle class (ref A). Fabio Pina, economist for the trade association Fecomercio, similarly emphasized to us that Brazilian economic output will benefit from a demographic increase in the share of working age population through 2020 which will relieve some pressure on public pensions and increase the labor pool. Externally, the current global context favors investment in emerging economies such as Brazil with high potential to expand domestic consumption. ¶3. (SBU) Additionally, world events such as the 2014 World Cup and 2016 Olympics to be hosted in Brazil will require a significant boost in investment in sports facilities, hotels, transportation, and urban development, which will stimulate growth in the construction and services sectors. According to Aurelio Bicalho economist at Itau, the Rio Olympic Games are likely to contribute a 0.7 percent increase in GDP growth in each of the four years preceding the 2016 event. Beyond the immediate impact of the World Cup or Olympic Games, leading private sector associations, such as the Sao Paulo Federation of Industries (FIESP) have welcomed the events in the hope that resulting improvements in transportation infrastructure boost long-term productivity and lower a key cost of doing business in Brazil. Most Economic Policy to Remain Unchanged -------------- ¶4. (SBU) Few private sector observers expect a significant change in current macroeconomic policies, regardless of who wins the 2010 presidential elections. Economic contacts such as Brazil's Central Bank (BCB) Senior Analyst Alexandre Pundek, Itau's Oreng, and Santander's chief economist, Alexandre Schwartsman, agree that both leading presidential candidates--Dilma Rousseff from the governing Workers' Party (PT) and Sao Paulo Governor Jose Serra from the Social Democratic (PSDB) party-- are committed to maintaining economic stability for Brazil's growth. Pundek told Econoff that both candidates recognize the current economic model is reducing poverty and strengthening the middle class. Monetary Policy May Loosen -------------- ¶5. (SBU) One possible area of moderate divergence is monetary policy, where Serra has long been a critic of high Central Bank interest rates. While many in the private sector expect rates to rise over the next year, as much as four percent according to Citibank's President Gustavo Marin, PSDB contacts such as Federal Deputy Walter Feldman and independent analysts such as Moody's Latin America Director Luiz Tess tell us they expect a Serra administration would try to bring rates below Brazil's historic average to accelerate growth. Given the Central Bank's general autonomy in recent years and broad aversion to stoking inflation, our contacts agree inflation will remain under control, though the target range could be slightly higher under a Serra government. One key factor on monetary policy in the next GOB administration will be the leadership of the Central Bank. Numerous contacts in the financial sector, including Pundek at the Central Bank, have pointed to speculation that current Central Bank Governor Meirelles may stay on as BCB Governor under either administration, as evidence that monetary policy would not change dramatically. Economic Obstacles Likely to Remain -------------- ¶6. (SBU) Although strong investment inflows, stable economic policies, a favorable global climate for emerging markets, an expanding domestic market, and positive demographic trends, are likely to boost Brazilian economic growth, doubts remain about long-term sustainability, deep-rooted poverty and lagging competitiveness. President Lula has publicly predicted that Brazil's economy will grow to fifth largest in the world by 2016, and a study by PriceWaterhouseCoopers published on January 22, predicts this could happen by 2013. However, skepticism is prevalent among private sector contacts as to how growth will address income inequality, poverty, and competitiveness issues. In conversations with business association leaders such Roberto Costa de Teixeira from CEAL and Roberto Giannetti da Fonseca from FIESP, optimism about Brazil's economic outlook is tempered with concern that opaque and onerous tax and labor requirements, high transportation costs due to poor infrastructure, and weak investment in human capital will continue to constrain growth and poverty reduction. Despite broad consensus on the need for tax and labor reforms as well as greater investment in public infrastructure and education, views are mixed on whether the next GOB administration, whether led by Rousseff or Serra, is likely to tackle the challenge during the next five years. Pessimists, including Schwartsman, suggest that any GOB administration emerging from the 2010 elections is unlikely to have the political support to push sensitive tax and labor reforms. However, others, such as Luiz Fernando Figueiredo, Chief Portfolio Manager at Maua Investimentos, and Octavio de Barros, Chief Economist at Bradesco Bank, have told us they expect both candidates to recognize the limited political window to address these issues and propose at least partial reforms early in their tenure. According to Barros, reforming the tax and labor regimes would boost economic growth by at least 1.5 percent of GDP annually. Finally, near-term concerns exist that increased government spending may be eroding the GOB's recent record of solid fiscal management (ref C). Comment -------------- ¶7. (SBU) Brazil has made impressive progress in achieving sustained economic growth and reducing poverty in recent years. Favorable economic conditions and a broad political consensus on preserving macroeconomic stability suggest Brazil, even without necessary reforms, will continue to grow respectably over the next decade at rates comparable to the 2003-08 period. Nevertheless, the inefficiencies and infrastructure constraints identified by private sector contacts remain a significant hurdle to achieving the higher growth rates necessary to fully address Brazil's income inequality and raise the country to "developed" within the next decade. End Comment. White