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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: elmatador who wrote (32519)	4/27/2003 2:22:36 AM
From: TobagoJack	Respond to of 74559

A Stronger Brazil Weakens Washington's FTAA Hopes Apr 25, 2003 stratfor.biz Summary Brazil's surprisingly stable economic performance under a new administration is one of several factors working against Washington's latest push for a hemispheric free trade agreement. Analysis Brazilian Foreign Affairs Minister Celso Amorim said Brazil plans to further delay discussions on a Free Trade Area of the Americas, Brazilian daily Valor Economico reported April 24. Amorim's comments follow a two-day visit from U.S. Treasury Secretary John Snow, who heaped praise on the new government's economic management and lobbied business leaders to accelerate discussions on a hemispheric trade agreement. Snow's visit was an important one for the United States as it seeks to mend fences with Brazil and resurrect plans for a Free Trade Agreement of the Americas (FTAA). But based upon Amorim's comments, the visit was not particularly successful on either count. While Snow left making optimistic sounds about the FTAA's future, Amorim called Snow's remarks over the trade area "little substantiated" and "little credible." In seeking to woo Brasilia, Snow is having to climb out of a hole dug by his predecessor, Paul O'Neill -- whose critical comments hurt Brazil's currency and enraged Brazilian leaders -- as well as by the Bush administration's generally poor foreign policy record vis-à-vis Latin America. This record has combined with profound ideological differences between the Bush administration and many Latin American leaders, including new Brazilian President Luiz Inacio "Lula" da Silva, to further distance Washington from most of the region. That distance has a direct impact on hemispheric trade negotiations, eroding faith among Latin American leaders that the Bush administration is willing to produce a mutually beneficial deal. There are several reasons beyond the currently cool relations between Brasilia and Washington that Snow was not greeted in Brazil with cheers and open arms. The near-death experience of the Doha round of trade negotiations last month and the likely failure of agriculture trade discussions has refocused Brazil on its own efforts to open U.S. agricultural markets. Access to U.S. markets and a reduction in U.S. agricultural subsidies is a very high priority for the Brazilian government. As hopes of a wider agricultural deal through the World Trade Organization fade and some of its allies, like Australia, are bought off with free trade deals of their own, Brazil is more apt to take matters into its own hands. Also, Brazil has made it through an all-important first few months with a new administration and is beginning to rebuild the confidence of international investors. Contrary to pre-election fears, da Silva has not taken a sharp left turn economically. In fact, he and his core economic team -- Finance Minister Antonio Palocci and Central Bank President Henrique Meirelles -- have instituted a fairly austere set of fiscal and monetary policies that have probably helped prevent Brazil's economy from tanking and have certainly encouraged foreign investors. Investors' hopes also are buoyed by planned tax and pension reforms. Though reforms will face a tough fight in Congress, da Silva has managed to gain the support of the powerful state governors for the pension plan. Brazil is far from out of the woods financially or economically. Its external debt is still massive, and 17 percent inflation is keeping interest rates in the high 20s -- stifling growth, which is predicted to be around an anemic 2 percent this year. Nevertheless, Brazil is now having an easier time refinancing its external debt as the real strengthens and funds become easier to access. This is softening investor fears that Brazil will be forced into a near-term debt default. Global emerging market investors also are beginning to look more favorably on Latin America, especially as the outbreak of severe acute respiratory syndrome (SARS) clouds Asia's economic future. The Brazilian currency, the real, reached an eight-month high this week at three to the dollar, a good sign of growing confidence in the da Silva team's economic management and Brazil's financial future. The country's main Bovespa stock market index has jumped 29 percent this year, in dollar terms rising to its highest levels in 10 months. And Brazil's bond market has rallied, with bond prices rising from 65 cents on the dollar in December to 85 cents on the dollar at present. Improving economic and financial prospects makes Brazil relatively less dependent on Washington, which controls the purse strings of the International Monetary Fund and the World Bank. The IMF is proud of its current $31 billion Brazil aid package, and the deputy director of the IMF's Western Hemisphere department said earlier this month, "It is clear that this government will not default -- ever." The IMF has a vested interest in making such broad proclamations, but nevertheless the doomsday scenarios surrounding Brazil are not playing out. Brazil, which co-chairs FTAA negotiations along with the United States, will not use its generally stronger position to advance an FTAA, as the United States would like -- as Amorin's statements about delaying the FTAA demonstrate. Instead, Brazil seems intent on pursuing a direct accord between the United States and Mercosur, which also includes Argentina, Paraguay and Uruguay. Valor Economico reported that Amorim will present a proposal to Trade Secretary Robert Zoellick next month to negotiate a direct accord between the United States and Mercosur. Such negotiations will be easier for Brazil to control and will be a platform to hammer home its own agricultural demands. Brazil likely is calculating that agricultural concessions will be easier to extract at the Mercosur level than within any sort of hemispheric agreement. Whatever happens with Amorim's proposal to Zoellick, Brazil's priorities will further sideline FTAA discussions. And no amount of praise by U.S. officials of Brazil's new leadership will do much to change it.