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Cool response to Brazil's plan to fire up economy

January 23, 2007|Chris Kraul | Times Staff Writer

BOGOTA, COLOMBIA — When Brazil's stagnant economy can be blamed for unrest caused by unemployed youths or headline-grabbing shootouts between police and drug gangs, expectations run high when the president promises a new spending plan.

But after Luiz Inacio Lula da Silva of Brazil unveiled his proposals Monday, hoping to get his second term off to a positive start, analysts were struck more by what his plan didn't do.

They said he failed to offer fresh ideas for winning over skeptical investors, and complained that his proposals lacked the dramatic steps that would enable him to reach his goal of lifting growth to 5% a year by the time he leaves office at the end of 2010.

Brazil's economy, the largest in Latin America, saw much progress during Lula's first four-year term, with exports doubling and its currency, the real, gaining 80% in value against the dollar. Interest rates and a crushing debt load have fallen significantly since Lula took office in January 2003.

Still, Brazil's Achilles' heel remains growth, just 2.7% on average in the last four years and among the poorest rates in the hemisphere. The main reason: abysmally low investment by the government and private sector.

"There is no magic to it, no David Copperfield trick. If there is no investment, the economy doesn't expand, and you don't grow jobs," said Alberto Ramos, a senior Latin American economist at Goldman, Sachs & Co. in New York.

Lula for weeks has been billing his plan as a blueprint for stronger growth during his second term. The main points, notably $236 billion in public works spending and $2.5 billion in tax breaks the next four years, are aimed at boosting public and private investment.

But analysts generally reacted coolly, saying the measures weren't nearly strong enough to cure what ails Brazil, a nation of 176 million people.

Investment is the broad term covering the money that companies and the government spend on factories, stores, roads, hospitals, schools and so on. By any measure, Brazil's investment is weak, just 20% of total economic output of $946 billion in 2006. That level of investment -- on par with that in Africa -- compares with 40% in China, 29% in Chile and 27% in Colombia.

Analysts praised some elements of the plan, notably spending to improve the fraying infrastructure. But even there, they found reason to worry.

Lisa Schineller, a bond analyst with Standard & Poor's in New York, said Lula could have been more decisive in reducing the snowballing burden of Brazil's social security system.

"If there had been concrete spending cuts outlined to finance the higher investment, the plan would have sent a stronger signal," Schineller said.

Paulo Levy, an economist with think tank IPEA in Rio de Janeiro, is concerned that the increased public works spending will trim the country's hard-won budgetary surplus. That could put off the day Brazil's bonds qualify for investment-grade status, which would significantly ease its cost of borrowing on global bond markets.

Ricardo Amorim, an investment strategist at WestLB bank in New York, said Lula should have proposed measures to increase the independence of Brazil's regulatory agencies, which he said were subject to political influence and therefore distrusted by investors.

President Bush "can't tell Ben Bernanke what to do with interest rates," Amorim said, referring to the Federal Reserve chairman. "And he can't tell the FCC how to rule on telecommunications issues," he said, referring to the Federal Communications Commission. "But the Brazilian equivalents are subject to interference."

Analysts said Lula's economic stewardship had on balance been positive. He confounded pessimists who thought he would overspend on social programs in line with his left-leaning politics. He calmed Wall Street, which expected Lula to start printing money.

But Brazil's improved financial health has come largely through one of the most onerous tax systems in the world. Tax collections account for 39% of economic output, triple that of Peru and Colombia.

Taxpayers are tapped out, economist Levy said, and the government will have to find a way to fill its coffers through economic growth.

"We have come a long way in changing the economy," he said. "But the fact is we have been growing much less than other emerging economies, and that creates a sense of frustration."

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chris.kraul@latimes.com

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