US embassy cable - 03BRASILIA697

UNCLAS SECTION 01 OF 02 BRASILIA 000697 
 
SIPDIS 
 
SENSITIVE 
 
NSC FOR JOANNA WALLACE 
TREASURY FOR OASIA/BACKES, GOTTLIEB 
PLS PASS FED BOARD OF GOVERNORS FOR WILSON, ROBATAILLE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, BR 
SUBJECT:  Brazilian Growth Prospects 
 
Ref. Brasilia 606 
 
1.  (U) Summary.  The Brazilian economy grew a modest 1.5% 
in 2002, as a strong export performance offset falling 
domestic consumption and investment.  The Central Bank 
expects growth will reach 2.8% in 2003, led by trade and 
agriculture and a modest increase in domestic consumption 
and manufacturing.  Many market analysts are more 
skeptical, though, noting that with high interest rates 
there are few new sources of growth that will drive 
economic expansion.  End summary. 
 
2002 Rescued by Trade 
--------------------- 
 
2.  (U) The Brazilian economy grew modestly in 2002, 1.5%, 
while GDP growth per capita was almost flat, 0.2%.  These 
results are almost the same as in 2001 (GDP growth of 1.4%, 
per capita GDP growth of 0.1%). 
 
3.  (U) Growth was spread relatively evenly across the four 
quarters in seasonally adjusted terms, although the fourth 
quarter turned in a relatively impressive year-on-year 
result, 3.4%, in part because production in the the last 
quarter of 2001 was depressed because of the energy crisis. 
 
4.  (U) For the year, agriculture registered the strongest 
growth, 5.8%, while industry and services both came in at 
1.5%.  However, industry did have a strong fourth quarter, 
growing at 6.9%. 
 
5.  (U) A more striking picture about the performance of 
the Brazilian economy in 2002 comes from the demand side. 
For the year, family consumption (-0.7%) and business 
investment (-4.1%) both fell, while the government 
increased by a modest 1.0%.  (Business investment finally 
began to pick up in the fourth quarter, growing 4.2%.) 
However, the real force behind what growth that took place 
was on the trade side, with exports up 7.8% and imports 
down 12.8%.  Together, these two factors contributed 2.8 
percentage points towards growth, offsetting falling 
domestic consumption and investment. 
 
What's in Store for 2003? 
------------------------- 
 
6.  (SBU) According to the Central Bank's survey of market 
analysts, the average GDP growth forecast for 2003 is 2%. 
However, that average disguises a wide range of views on 
2003 growth potential.  In early February, Luis Fernando 
Lopes of JPMorgan increased his forecast to 2.5%, arguing 
that the strong performance by the trade sector should 
continue to pull the economy along, while underplaying the 
impact of interest rate increases, saying that they have 
little impact on the average consumer.  Rodrigo Azevedo of 
Credit Suisse First Boston, on the other hand, estimates 
that growth will only be 1.0% for the year.  He allows that 
the trade sector should be strong, but asserts that it will 
be the only factor for growth, while domestic consumption 
and investment will be suppressed by tight fiscal and 
monetary policy.  Andrei Spacov of Unibanco lowered his 
forecast for 2003 from 2.0% to 1.5% because of the recent 
tightening of monetary policy (reftel). 
 
7.  (SBU) Econoff discussed 2003 growth prospects with 
Altamir Lopes, Chief Economist at the Central Bank.  Lopes 
defended the Central Bank's 2.8% growth projection as 
realistic.  He said the projection is based on continued 
growth for agriculture.  He noted that the industrial 
sector had been growing for seven months, and the 2003 
projection does not call for additional acceleration but 
assumes the sector will maintain its reasonable performance 
from the last quarter of 2002 (2.4% growth).  Lopes added 
that that two subsectors, petroleum and electricity, should 
grow rapidly, providing an additional impetus for overall 
growth.  He noted that the construction sector has begun to 
pick up as well, and the Central Bank forecast assumes it 
will continue to grow at a relatively modest 2.4%. 
 
8.  (SBU) On the demand side, Lopes expects continued 
strong growth due to exports and import substitution.  (He 
noted that the impact of growing exports has been magnified 
domestically since, with the depreciation of the real, 
dollar-denominated trade has increased its weight in the 
Brazilian economy.)  Lopes argued that family consumption 
should pick up even with suppressed real wages, pointing to 
increased income in the agricultural sector, increased one- 
time disbursements of unemployment benefits (FGTS), and 
increased social payments under the Lula administration. 
And Lopes expects that certain industries will continue to 
invest, noting that some export industries are operating at 
capacity or are anticipating continued growth. 
 
9.  (SBU) Lopes ended by noting that the 2.8% projection 
assumes little economic fallout from a quick war in the 
Middle East.  He said a protracted war might reduce growth 
by around 0.3 percentage points. 
 
10.  (SBU) Comment.  Lopes highlights a range of factors 
that could sustain growth in 2003, although we would be 
surprised if the economy expands 2.8% this year.  Given 
that domestic consumption and investment has been flat for 
two years because of economic turbulence, we suspect that 
there is significant pent-up demand that could be released 
if the overall economic environment is benign.  That is a 
big if, however, given uncertainties about a war with Iraq 
and the ability of the Lula government to deliver economic 
reform.  On top of that, the government is going to have to 
maintain tight monetary and fiscal policy.  Therefore we 
expect that growth is more likely to be in the range of 
1.5-2.0%, and at most around 2.5% if everything breaks the 
right way. 
 
Goughnour