Latin Finance - March 2008 - 27

Brazil macro economics says Bacha. Even so, some contraction may be necessary for the slow-moving PAC, although Fleischer says another round of highway concessions is imminent and a second auction of a hydro electric power station on the Rio São Francisco is slated for May. Government accountants are meanwhile revising projections to revenues, saying that they expect 10 billion reais to be generated from economic growth, says Tom Trebat, executive director at the Center for Brazilian studies at Columbia University. That looks too optimistic in a year when the global economy is trending down much faster than anticipated. Growth may slump to as low as 2.0%-2.5% next year, thanks to a full unwinding in credit markets and global knock-on effects, says Walter Molano, head of research at BCP Securities. Fiscal deterioration comes at a time of a rapid deterioration in the trade balance, with imports up 32% last year, driven by a strong real. These uncertainties and higher global inflation are now feeding into worries about interest rates. As Bacha points out, the government had been counting on a rapid decrease in rates to reduce the deficit. That does not look likely, particularly given Henrique Meireilles’ reputation for resolute hawkishness. The outcome of all this is likely to be a delay in Brazil obtaining the coveted investment grade. Trebat points out that agencies are more risk averse after miscalculating the extent of the credit crisis, and that tax reform is a prerequisite. It is not just in the financial sphere that the CPMF defeat is hurting. It has made an already cautious government more dithering and underscores the likelihood that two years of fractious politics will follow. Already, the opposition has gone to the supreme court to try to declare proposals for new financial transaction taxes unconstitutional. Doubtless, there will be plenty more opportunities for such antics, with municipal elections slated for October. And the campaigning schedule means that there are only another three months of useful time in congress this year, points out Fleischer. That means the faint hope of reforms in tax or labor laws passing have been consigned to the dustbin. The overall sense of stagnation and shapeless agenda is highlighted by a preoccupation with appointments. Lula seems determined to please all parties to keep squabbling factions of his unwieldy coalition happy ahead of October elections. That is likely to prove difficult, says Fleischer. The PMDB is engaged in a bloody battle internally between senators and deputies who are each rooting for their own candidates. And other parties in the coalition are calling for more spoils. The contortions of this process are seen in the appointment of the inexperienced but key ally, Senator Edison Lobão, to the highly sensitive position of mines and energy minister. The decision came despite Lobão’s son and suplente, his designated substitute, being investigated for transferring shares to his maid to avoid taxes, as well as alleged corruption in the acquisition of local media. The depressing reality is that the last two years of Lula’s government may look rather like the last year of the Bush presidency in the US. It will be characterized by growing irrelevancy an opposition that is in the ascendancy and increasingly bolshy, as well as a weakening economy. The only major difference is Lula’s continuing popularity. That should shield him from the need to enact reform. LF 2008 March LATINFINANCE 27

Latin Finance - March 2008

Table of Contents for the Digital Edition of Latin Finance - March 2008