US embassy cable - 04BRASILIA666

UNCLAS SECTION 01 OF 02 BRASILIA 000666 
 
SIPDIS 
 
NSC FOR SHANNON, DEMPSEY, CRUZ 
TREASURY FOR OASIA/SEGAL 
FED BOARD OF GOVERNORS FOR ROBATAILLE 
USDA FOR U/S PENN, FAS/FAA/TERPSTRA 
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC 
SOUTHCOM FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, ETRD, PREL, PGOV, BR, Economic Policy & General Analysis 
SUBJECT: "Paralysis" of GoB's Microeconomic Program 
 
 
1.  A column in the March 5-7 issue of top financial daily 
`Valor Economico' summarized pessimists' view that the Diniz 
scandal and other hurdles have resulted in a semi-breakdown 
of the legislative progress of the GoB's so-called 
`microeconomic' reform measures, which are generally 
acknowledged as vital to sustain Brazil's future growth. 
Following is Embassy's unofficial and slightly edited 
translation of the column by `Valor' commentator Claudia 
Safatle. 
 
3.  (Begin Text of Unofficial Embassy Translation) 
 
(HEADLINE) Paralysis is Conquering the Government 
 
The Waldomiro Diniz case is one problem.  But the 
government's real problem is a different one: economic 
growth.  This is the grave question to which the government 
needs to give quick answers, and for this it needs to break 
out of its paralysis.  It is not viable to conduct an 
economic policy that produces a retraction of 0.2% of the 
Gross Domestic Product, loss of real income, fall of per 
capita income, and spectacular growth (in the neighborhood 
of 140%) in profits of the banking system.  Something is 
wrong. 
 
From the start of the Diniz episode, from February 13 to the 
present, notwithstanding the political tangles which the 
government and PT got themselves into trying to manage the 
revelation of the corruption of Planalto's ex-advisor, the 
Presidency has held endless meetings of the government's 
power-nucleus, to try to emerge from paralysis and create a 
"growth agenda." 
 
In formulating this initiative, the government has taken 
over from the hands of the bureaucracy, and is now parading, 
measures to stimulate civil construction, a sector that fell 
heavily last year (8.6%).  Now, the government is attempting 
to announce on an almost weekly basis measures of a more 
microeconomic nature to resolve problems that do indeed 
restrict investments, without which there will be no growth 
at all.  And to make these unveilings into events with 
maximum impact on public opinion.  Among the provisions 
already ripe to be announced is a new industrial policy for 
four already-defined sectors: software, pharmaceuticals, 
capital goods, and semi-conductors. 
 
The resumption of interest rates' downward trajectory is a 
central part of the problem and here there is a conundrum to 
resolve: the Central Bank sees robust economic growth as 
having been underway since last October, with accompanying 
inflationary pressures.  The CB President, Henrique 
Meirelles, has said that the economy finished 2003 growing 
at a rate of 1.5% (in the last quarter) which, annualized, 
would represent an increase in GDP of 6.14% this year. 
Yesterday, in meetings with market representatives in Sao 
Paulo, directors of Central Bank reiterated this vision. 
"People talk as if Brazil were not growing on a current 
basis because of the minus 0.2% from last year, and as if we 
will have to strain to grow 3.5% (in 2004).  That's not 
true.  It's nonsense.  Brazil is growing at an aggressive 
rate and even if we reduce this rate, we will reach 3.5% 
growth this year," commented Meirelles to `Valor'. 
 
As the market sees it, in the first two months of 2004 the 
level of activity started to go cold and there are no 
menacing inflationary pressures on the horizon.  The great 
majority of banks and consultants are lowering their 
estimates of economic growth for this year.  Those who 
expected 4% are now closer to 3%, and there are those who 
project less than 3%... 
 
There has never been, during the existence of the inflation- 
target regime established in 1999, as profound a disconnect 
as now between the Central Bank and the market in their 
respective assessments of the economic situation... 
 
The difficulties in fostering the growth which in the 
Central Bank's view is going great guns but as far as the 
market is concerned is bogged-down and lacks new investment, 
don't stop, however, with the COPOM (Central Bank's Monetary 
Committee.)  It is just part of the problem and should not 
be held responsible for all the nation's ills. 
 
The other part, no less important, has to do with whether or 
not the country today has a favorable environment for 
investments.  The private sector says the environment is 
bad, and the government doesn't dispute this view.  It even 
has a list of things to do to improve things.  The challenge 
is to turn this generic list into concrete measures in a 
quick, effective way. 
 
The new energy model is an example.  It took months to 
construct a proposal, months to negotiate it, and it was 
approved by Congress just yesterday (March 4).  The basic 
rules for investments in sanitation and water-treatment 
circulate from hand to hand along Ministry Row.  After the 
government announces the preliminary bill for regulation of 
this sector, it will be presented for public audience and 
only after this process will it go to Congress. 
 
The role of the regulatory agencies was the focus of a 
concept document elaborated at the end of last year by the 
Civil Household (Casa Civil.).  Brought before a public 
forum, the document received more than 200 suggested 
amendments.  The government promised to transform the 
document into a bill that would define the exact role of 
regulatory agencies, but has not mentioned the subject 
since.  The sole bill sent to Congress on this subject had 
to do with the contracting of employees for Aneel and Anatel 
(electricity and telecomm regulatory agencies.) 
 
If it doesn't resume these initiatives, the government will 
end up hurting growth in future years, since this year's is 
a given... 
 
(End Text of Embassy Translation) 
 
HRINAK