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### Viewing cable 06BRASILIA1036, BRAZIL - A/S SHANNON MEETING WITH FINANCE MINISTER

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06BRASILIA1036 | 2006-05-31 17:38 | 2011-07-11 00:00 | CONFIDENTIAL | Embassy Brasilia

`

    VZCZCXRO3511
    PP RUEHRG
    DE RUEHBR #1036/01 1511738
    ZNY CCCCC ZZH
    P 311738Z MAY 06
    FM AMEMBASSY BRASILIA
    TO RUEHC/SECSTATE WASHDC PRIORITY 5499
    INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
    RUEHRG/AMCONSUL RECIFE 4843
    RUEHSO/AMCONSUL SAO PAULO 7043
    RUEHRI/AMCONSUL RIO DE JANEIRO 2148
    RUEHBU/AMEMBASSY BUENOS AIRES 4035
    RUEHSG/AMEMBASSY SANTIAGO 5527
    RUEHAC/AMEMBASSY ASUNCION 5450
    RUEHMN/AMEMBASSY MONTEVIDEO 6265
    RUEHME/AMEMBASSY MEXICO 1977
    RUEHCV/AMEMBASSY CARACAS 3260
    RUEHBO/AMEMBASSY BOGOTA 3761
    RUEHQT/AMEMBASSY QUITO 1833
    RUEHLP/AMEMBASSY LA PAZ 4604
    RUEHPE/AMEMBASSY LIMA 3004
    RUEHC/USDOC WASHDC
    RHEHNSC/NSC WASHDC

` `

    C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 001036

    SIPDIS

    SIPDIS

    NSC FOR CRONIN
    TREASURY FOR OASIA - DAS LEE, DDOUGLASS
    STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
    USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
    USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
    STATE PASS USAID FOR LAC

    E.O. DECL:05/25/2016
    TAGS: EFIN EPET EINV PGOV PREL BR BL
    SUBJECT: BRAZIL - A/S SHANNON MEETING WITH FINANCE MINISTER
    MANTEGA

    REF: A) BRASILIA 1008

          B) BRASILIA 0961
          C) BRASILIA 0888 and previous

    Classified by Charge d'Affaires Phillip T. Chicola, reasons 1.4
    (b) and (d).

    ¶1. (C) Summary:  In a wide-ranging May 22 meeting,
    recently-appointed Finance Minister Guido Mantega told A/S
    Shannon and the Charge that Brazil's economy was "sound" and in
    good shape to weather the current volatility on world financial
    markets.  Mantega and his International Secretary, Luiz Pereira,
    credited Brazil's decreased vulnerability to continuing high
    trade and current account surpluses, which have enabled it to
    pay down external debt and accumulate substantial reserves.
    Mantega reaffirmed the GoB's commitment to sound fiscal policy
    and to meeting its 4.25% of GDP primary surplus target.  He said
    the GoB understood the importance of further social security
    system reforms to bring under control the system's burgeoning
    deficit, but noted that Lula would not publicly address this
    politically-sensitive reform prior to the October presidential
    elections.  Turning to regional issues, Mantega affirmed that
    Bolivian gas would keep flowing, that there would be a
    negotiated price increase and that Petrobras energetically would
    defend its commercial interests in all appropriate fora.
    Shannon emphasized the importance of Brazil's
    institution-building and regional integration efforts in light
    of the wave of populism in the region.  End Summary.

    ¶2. (SBU) In a May 22 meeting, recently-appointed Finance
    Minister Guido Mantega told visiting WHA A/S Tom Shannon that
    the Brazilian economy is doing well, and that the GoB has its
    fiscal accounts under control and is committed to meeting the
    4.25% of GDP primary surplus target.  Revenues were up,
    primarily due to the strong profitability of certain economic
    sectors (mining, banking, oil), rather than tax rate increases,
    the FinMin affirmed.  Mantega boasted that the Lula
    administration has run bigger primary surpluses than its PSDB
    (opposition party) predecessor, a commitment that has helped the
    GoB reduce its net-debt-to-GDP ratio. (Comment: Mantega, who in
    his previous jobs criticized the Finance Ministry's fiscal
    orthodoxy, in particular its over-performance of the primary
    surplus target, delivered the fiscal talking points without
    irony.  End Comment.)  Contrasting the current situation with
    that when the Lula Administration took office, Mantega affirmed
    that no one questions the GoB's ability to service its debts.
    Indeed, the GoB had pre-paid its debt to the IMF and the Paris
    Club and had re-purchased its Brady Bonds.

    Market Volatility
    -----------------

    ¶3. (SBU) Mantega told Shannon that the GoB's strong external
    accounts have reduced substantially its vulnerability to a
    financial crisis.  In the waiting room prior to the meeting,
    International Secretary Pereira noted to Shannon that the
    uncertainty in international financial markets over the course
    of the Federal Reserve's future interest rate decisions drove
    the nearly 4% depreciation of the Real against the dollar on May
    ¶22.  (Note: this was followed by an almost 5% depreciation on
    May 24 and then a sharp rebound on May 25.)   Pereira stated
    that Brazil was well-prepared for a period of market volatility,
    with continuing strong trade and current account surpluses
    driving a marked improvement in the country's external position.
     Both the GoB and private sector have reduced external debt.
    The GoB, moreover, has built up a large stock of international
    reserves (US$63.5 billion as of May 12), which was now almost
    equal to its net external debt and well in excess of short term

    BRASILIA 00001036  002 OF 003

    debt.  Pereira expected that the markets would find a new
    equilibrium once the Fed's intentions became clear.

    Defending the Administration's Economic Record
    --------------------------------------------- -

    ¶4. (SBU) While average economic growth under the Lula
    Administration has been between 3% and 3.5%, Mantega affirmed
    that Brazil's economy could grow as much as 5% this year.
    Growth was improved, moreover, over the 2% to 2.5% average of
    the previous decade.  "Brazil is not China," he stated, and
    cannot grow at rates upwards of 7% because it already reaped the
    large productivity gains that come from industrialization and
    the move from a primarily agricultural to an industrialized
    economy in the 1960's and 1970's.  Brazil is democratic, and the
    government cannot impose reforms, although the GoB patiently has
    been strengthening economic institutions, such as the
    independent regulatory agencies.  During Lula's term, Mantega
    stated, industry had grown strongly and employment was up
    significantly, as were wages and per capita income.  The
    food-processing industry in particular was creating substantial
    numbers of new jobs, primarily in small and medium-size cities.

    ¶5. (SBU) Turning to the reform agenda, Mantega catalogued a
    series of reforms the GoB has undertaken or hopes to undertake,
    without clarifying which he considered priorities.  "I've never
    seen a government undertake so many reforms," he boasted.
    Mantega stated that the GoB understands there is a need to
    reform the social security system, which is running increasing
    deficits (septel), but it was not the time publicly to discuss
    the sensitive issue, given the October presidential elections.
    In addition, awaiting congressional action are bills to unify
    the state-level value added taxes (ICMS), a bill to cut red tape
    for small and micro-enterprises, and a new competition law.  The
    GoB already has undertaken targeted measures to reduce taxes on
    certain sectors and would like to simplify the bureaucratic
    requirements for imports, Mantega stated.  The GoB also plans
    labor union reform and other (unspecified) reforms that it could
    not publicize during an election year, according to Mantega.
    Pereira added the GoB has undertaken measures to reduce the cost
    of capital and plans to take additional such steps in the
    future.

    Trade and Regional Integration, Institution-building
    --------------------------------------------- -------

    ¶6. (SBU) Although still relatively small as a percentage of GDP,
    Brazilian trade is growing quickly as the country inserts itself
    into the global economy, Mantega stated.  Exports have been very
    strong, driving current account surpluses that have kept the
    exchange rate at appreciated levels.  The country needs to
    increase imports, Mantega affirmed.  Pereira noted that the GoB
    has focused on facilitating infrastructure development to
    underpin regional integration, such as a new bridge on the
    border with Peru and the paving of a trans-Andean highway in
    that country that together would create physical links to
    Brazil.  These efforts have included financing from the National
    Development Bank (BNDES -- over which Mantega used to preside).
    The GoB also aims to reduce the asymmetries among the large and
    small Mercosul members and would like to strengthen its
    institutions.  As part of this effort, the Finance Ministry
    leads GoB participation in the Mercosul macroeconomic
    convergence dialogue, Pereira said.  Shannon applauded the GoB's
    focus on institutional strengthening and regional integration,
    particularly given the role that weak institutions have played
    in facilitating the current wave of populism in the region.

    Bolivia: Reality Comes Knocking

    BRASILIA 00001036  003 OF 003

    -------------------------------

    ¶7. (C) Bolivian President Morales was starting to come up
    against reality and likely would walk back some of his wilder
    pronouncements, Mantega stated.  Bolivian gas would keep
    flowing, Mantega affirmed, although he acknowledged that the
    price Brazil paid (currently US$3 per 1000 BTU) needed to
    increase to better track oil and gas prices on world markets.
    Betraying irritation, Mantega argued that Morales should have
    made use of the existing contractual mechanisms to pursue price
    negotiations, rather than sending in troops to occupy Petrobras
    facilities.

    ¶8. (C) Bolivia, Mantega argued, is much more reliant on Brazil
    than vice versa.  Brazil will develop additional domestic gas
    sources capable of producing gas volumes equivalent to those it
    currently receives from Boliva, according to Mantega.
    Petrobras, moreover, is even less reliant on Bolivia, which
    accounts for only about two percent of its investments
    world-wide.  The GoB also had agreed to put consideration of IDB
    debt forgiveness on hold for the time being, according to
    Mantega.  At the political level, however, President Lula would
    not take a strident line, Mantega stated, but rather take the
    same tone a parent would take when firmly disciplining an errant
    child.  Nevertheless, Petrobras, Mantega declared, would defend
    its commercial interests in all appropriate fora.

    ¶9. (C) Comment:  Mantega clearly is still settling into the job
    and becoming familiar with the subject matter.  He put on a
    credible show, however, and was careful to avoid stepping on the
    Central Bank's toes, referring only briefly to monetary policy
    and limiting his comment to noting that the current situation
    was "satisfactory."  At times he was clearly enjoying himself,
    joking, i.e., "as my right arm is in a sling, the fact that I
    shake hands with my left hand doesn't mean I am a leftist."
    Most welcome was Mantega's acknowledgement of the need for
    reform to stanch the budgetary bleeding in Brazil's social
    security system.  That effort needs to succeed, as the
    burgeoning social security deficit, combined with constitutional
    earmarks and growing obligatory expenditures, will leave the
    next administration with little ability to make critical
    investments.

    ¶10. (U) This cable was cleared by A/S Shannon.

    CHICOLA

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