Brazzil Politics February 2003 www.brazzil.com

All is not as rosy as financial markets would have us believe. Congress practically will be in recess until after Carnaval (March 1st to 4) and facing the reality of governing may be postponed for a while.

Richard Hayes

Since Lula's colorful inauguration January 1st, statements by the incoming Finance Minister, Antônio Palocci and the new central bank president, Henrique Meirelles, have helped to strengthen the real and quotations for Brazilian assets. They repeated intentions to continue fiscal and monetary austerity and control inflation. Brazilian banks and blue chip companies are expected to raise nearly US 1 Billion in international credit markets this month, which has contributed to a semi euphoric reaction on the part of market players.

So far the government has not indicated that a bond issue is in the mill. But it would not surprise me if Meirelles, who must be sifting through offers of eager investment bankers seeking arrangement fees, takes advantage of this window of opportunity, which can slam shut again at the first sign of disillusion on the part of observers, most of whom still maintain an attitude of silent skepticism.

With congress in recess until mid February when they will meet to elect the presidents of the two houses before taking another break until after Carnaval, facing the reality of governing may be postponed for a while. Before Christmas, federal legislators voted themselves a 54 percent increase in salaries and other benefits. This has caused state and municipal representatives of the people to think about increases for themselves.

Now measures are proposed to allot more funds to the congressmen and senators to maintain their offices in their home states. Perhaps measures to give a raise to Lula and other members of the executive branch of government will be introduced. Lula now earns about 75 percent of what a congressman takes home. This foolishness will make it difficult for the government to resist the clamor for salary increases on the part of employees at all levels.

Not much notice was taken of the fact that the only two heads of state attending the swearing in ceremonies that actually met in private for meals with Lula were Hugo Chavez and Fidel Castro. Chavez seeks help from Petrobras to break the strike of Venezuela's government owned oil company that is crippling the country. Fidel has promised cooperation in Brazil's "social revolution" in the areas of public health and education where Cuba has done well by Latin American standards. I doubt if Lula, a union man, will allow Petrobras to act as a scab in Venezuela. There is a big difference between sending technical people to help out at PDVSA, something that Chavez would like, and selling them a tanker load of gasoline, which was done in December.

Lula has installed his ministers and heads of important secretariats and big government entities such as Petrobras, Caixa Econômica Federal, Banco do Brasil, BNDES etc. He created three new ministries and a few special commissions in order to accommodate people of his own PT (Partido dos Trabalhadores—Workers Party) and allies seeking employment. He also plans to resurrect SUDENE and SUDAM, two inefficient regional development agencies that were always riddled with corruption and favoritism in the past. FHC managed to scuttle these organs. Lula's perhaps well meaning efforts to help develop the backward northeast and Amazon regions may only result in more money thrown away in salaries of cohorts.

All for Hunger Fight

The festivities in Brasília on New Year's Day displayed a lack of decorum but the PT and Lula had their way. Lula, who likes rubbing shoulders with the people, has developed bursitis in his right shoulder. That plus concern on the part of his security forces may minimize these occurrences in the future. Lula's speech, only one of a series of long-winded orations, concentrated on his battle to eliminate hunger. No details as to how this worthy goal might be attained are yet available.

Lula made it public that the purchase of 12 new jet fighters to replace the aging Mirage fleet, will be postponed in order to use these funds to combat hunger. The foreign press picked this up saying that Lula is wisely trading guns for butter. Local commentaries have pointed out that the US$ 760,000,000 earmarked for the purchase of new planes is not in the budget and in fact does not exist.

The planes were to be financed by the yet to be chosen suppliers who would have to purchase an equal amount of Brazilian products to compensate. The Air Force was taken completely by surprise, but the new commander of the FAB (Força Aérea Brasileira), brigadeiro Luiz Carlos Bueno, stoically accepted the measure saying that it is up to the government to determine priorities. I think we have not heard the end of this first act of demagogy on Lula's part. He probably was not informed on the details of the planned purchase to replace the fleet based in Anápolis, state of Goiás, that must be retired in 2005.

During his campaign for election, Lula and the PT actively courted the military. This seems ironic since Lula and many of his "comrades," as he has instructed people in the government to call one another, were locked up for subversion and other charges during the 21 year period of military rule. His more moderate stance, staged by Duda Mendonça Lula's campaign manager, plus promises to pay more attention to the needs of the three arms, managed to gain tacit support from this important part of Brazilian society.

Army for All

Since the election and Lula's taking office, the minister of defense, José Viegas Filho, who was not a man that the military wanted in the post, along with other ministers has volunteered the use of the army and its bases for non military purposes. The minister of sports wants to use bases for sports activities. The man in charge of the Zero Hunger program has enlisted the help of the armed forces to distribute food. The minister of education wants their help to eradicate illiteracy. The justice minister wants them to assume the role of policing Brazil's borders currently performed as stipulated in the constitution by the federal police that falls under the jurisdiction of the ministry of justice.

Then there is the matter of road construction and maintenance of federal highways that the transport minister is requesting help from the military. It remains to be seen how all this will set with the military. Those on active duty cannot speak out, but through the retired and reserve officials, their discontent can be eventually felt. In my opinion, Lula would be wise to not neglect the armed forces whose budgets were drastically curtailed during the FHC years.

Lula has yet to confirm or negate the recent declaration of the minister of science and technology. In an interview with BBC, minister Roberto Amaral ambiguously stated that Brazil should be capable of making an atomic bomb. The International Agency for Atomic Energy that has its hands full with North Korea and Iraq at the moment was surprised. Foreign minister Celso Amorim is doing his best to clarify Amaral's stupid remarks. But in a matter of such gravity, it is up to the president to come out and deny such intentions and fire the incompetent minister who should have kept his mouth shut. Amaral is in the hospital being treated for pneumonia and could resign for health reasons saving Lula the trouble.

All is not as rosy as financial markets would have us believe. But Brazil is looking to Lula to bring about a better life for its citizens. It is too early to judge how this will all work out. We are in summer and many people are on vacation so things are still not running at capacity. The next two or three weeks will give us a better idea if Lula is up to the task that 62,000,000 Brazilians bestowed upon him.

Richard Edward Hayes, and his wife Jane, first came to Brazil in 1964 as an employee of Chase Manhattan Bank. During the past thirty-eight years, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br

This article appeared previously at the Globond site - www.globond.com.br

news.bbc.co.uk Monday, 13 January, 2003, 05:59 GMT

Increased supplies are little comfort for the US

Oil prices have remained unmoved as Organisation of the Petroleum Exporting Countries (Opec)'s agreement on Sunday to increase supplies is considered inadequate to meet US needs.

Oil has been trading at about $30 per barrel as a US war with Iraq and strike in Venezuela, the world's fifth largest exporter, has pushed US reserves to near 26-year lows.

Opec "stabilising" supplies

"There are delays in getting oil from the Middle East to the US," said David Thurtell, commodities strategist at the Commonwealth Bank in Sydney.

"The global market is going to remain tight with ongoing war fears," he added.

Deliveries from the Middle East take between four to six weeks to reach the US.

US light crude see-sawed in Asian trade, falling by almost 50 cents to $31.20 a barrel, then rising above its opening price before returning to $31.68 at 0512 GMT.

Trade on the International Petroleum Exchange (IPE) in London, the world's main oil market, begins at 0900 GMT.

Supply threats

The Venezuelan strike and the looming threat of war had pushed US crude prices to a two-year high of $33.65 at the end of December.

The high cost of oil could threaten the global economy which is still struggling to show any significant growth.

Oil shipments by Venezuela, the world's fifith biggest exporter which supplies 13% of US needs, still down to about 20% of normal export levels.

Iraq sells up to two million barrels per day on the international market but that would be stopped if there was a war.

Opec increased official production by 1.5 million barrels per day (bpd) during the emergency meeting in Vienna.

"Opec is trying to send a very strong message that it will do its utmost to stabilise demand and supply," said the cartel's president Abdullah bin Hamad Al Attiyah.

Another Opec meeting is scheduled on 11 March.

news.bbc.co.uk Monday, 13 January, 2003, 05:59 GMT

Increased supplies are little comfort for the US

Oil prices have remained unmoved as Organisation of the Petroleum Exporting Countries (Opec)'s agreement on Sunday to increase supplies is considered inadequate to meet US needs.

Oil has been trading at about $30 per barrel as a US war with Iraq and strike in Venezuela, the world's fifth largest exporter, has pushed US reserves to near 26-year lows.

Opec "stabilising" supplies

"There are delays in getting oil from the Middle East to the US," said David Thurtell, commodities strategist at the Commonwealth Bank in Sydney.

"The global market is going to remain tight with ongoing war fears," he added.

Deliveries from the Middle East take between four to six weeks to reach the US.

US light crude see-sawed in Asian trade, falling by almost 50 cents to $31.20 a barrel, then rising above its opening price before returning to $31.68 at 0512 GMT.

Trade on the International Petroleum Exchange (IPE) in London, the world's main oil market, begins at 0900 GMT.

Supply threats

The Venezuelan strike and the looming threat of war had pushed US crude prices to a two-year high of $33.65 at the end of December.

The high cost of oil could threaten the global economy which is still struggling to show any significant growth.

Oil shipments by Venezuela, the world's fifith biggest exporter which supplies 13% of US needs, still down to about 20% of normal export levels.

Iraq sells up to two million barrels per day on the international market but that would be stopped if there was a war.

Opec increased official production by 1.5 million barrels per day (bpd) during the emergency meeting in Vienna.

"Opec is trying to send a very strong message that it will do its utmost to stabilise demand and supply," said the cartel's president Abdullah bin Hamad Al Attiyah.

Another Opec meeting is scheduled on 11 March.

www.miami.com Posted on Mon, Jan. 13, 2003 BY CHRISTINA HOAG choag@herald.com

From airlines to oil refineries, traders to soft-drink bottlers, U.S. companies that do business with Venezuela are reeling from the effects of the South American nation's unrelenting 42-day-old national strike.

''We're all in pain,'' said Francisco González, president of the Venezuelan American Chamber of Commerce of the United States, which represents some 300 Venezuelan-linked businesses. ``It's worrisome. Some businesses have had to close, others are desperately looking for new clients.''

The strike, called Dec. 2 by opposition leaders to pressure leftist President Hugo Chávez out of power, has virtually shuttered Venezuela's commercial sector and paralyzed its vital oil exports.

Losses are now spilling over into South Florida, which has traditionally counted Venezuela as one of its top three international trading partners as well as a key source of shopping-loving tourists.

Under normal conditions, 50,000 Venezuelans come to Miami per month, typically spending $1,200 to $1,500 each. Visitors double over the December holidays, according to the Venezuelan Chamber.

But November witnessed the arrival of only 7,000 Venezuelans in Miami, González said. ''Do the math and you can see the loss in revenue for Miami-Dade County,'' he said.

New visa restrictions will choke that tourist market even further. Fearing an influx of visitors who don't want to return to a nation careening toward civil war, the State Department announced last month that the Caracas embassy will not renew or issue new visas to Venezuelan nationals as of Jan. 20.

Airlines have trimmed their operations accordingly. United Airlines shut down its office in the Venezuelan capital and canceled its daily Miami-Caracas flight, while American Airlines has suspended its routes to Caracas from Dallas/Fort Worth and San Juan, Puerto Rico, until Jan. 31.

For security reasons, the carrier has changed the schedules of its remaining four Miami-Caracas flights so crews and planes do not have to stay overnight in Venezuela.

The crisis, which shows no sign of abating, is exacting a particularly heavy toll on South Florida's trade sector.

''We have merchandise sitting in warehouses without possibility of shipping it,'' said Alberto Villegas, president of Pantrade, a Miami importer-exporter who relies on Venezuela for about 40 percent of his business. ``The shipping lines don't want to go there.''

The trade flow has dried up so completely that Xiomara Castillo decided to temporarily shutter her Hialeah export firm, Transoceanic Trade, which sends heavy machinery and parts to the country's state oil company Petróleos de Venezuela and mining firms.

''It's not safe to send the shipments,'' she said. ``The situation is very volatile, you don't know if the ports and customs are working or if there's gasoline for the truckers to deliver the goods.''

Ports are in fact technically open, said Bruce Brecheisen, vice president of Seaboard Marine in Miami, but that did not keep the shipping line from suspending sailings. ''We had to divert Venezuela-bound cargo to Cartagena, Colombia, and Río Haina in the Dominican Republic,'' he said. ``We're waiting for the situation to improve.''

The one item that Venezuelans are sending abroad is money. Coral Gables-based Commerce Bank, owned by Caracas' Mercantil Servicios Financieros, has recently seen a 25 to 50 percent spike in deposits from Venezuelan clients.

''The purchase of dollars by individuals has gone up,'' bank Chairman Guillermo Villar said. ``We're seeing more flow [of money] coming in.''

Oil companies wish that were the case. The strike has slowed the flow of petroleum from the world's fifth-largest oil exporter from 2.5 million barrels per day to 400,000.

The situation is difficult at Tulsa, Okla.-based Citgo Petroleum, which is wholly owned by Petróleos de Venezuela and receives about half of its crude from Venezuela. The company's four U.S. refineries process 865,000 barrels of oil a day to supply 14,000-plus gasoline stations across the United States.

The company has so far managed to keep pipelines flowing thanks to the spot market, but the crude crunch may get so severe that the U.S. government, a favorite target of Chávez's incendiary rhetoric, may have to bail it out as a matter of national security.

''We talked with the Department of Energy early on and told them we may reach a point where we may need to borrow from the Strategic Petroleum Reserve and repay it at a later date,'' spokesman Kent Young said. ``The DOE hasn't made a decision yet.''

Foreign companies operating in Venezuela are in a bind. They don't want to be seen as actively getting involved in domestic politics, but at the same time if they start operating, they run a risk of violent attacks.

Most multinationals are at a standstill simply due to practical reasons. Operations at Venezuela's Coca-Cola bottler, Miami-based Panamco, are involuntarily paralyzed as most employees cannot report to work due to scarce gasoline supplies, Chief Financial Officer Annette Franqui said.

''It's not feasible to operate,'' she said. ``We sold one day during the beginning of the strike, but right now plants are not operating. We don't want to produce because product becomes obsolete as we cannot guarantee delivery.''

With Venezuela's gross domestic product predicted to plummet a stunning 12 percent in the first quarter of 2003, Venezuelan business people -- such as Ariel Acosta-Rubio, president of the Churromanía fast-food franchise -- are looking to the United States for salvation.

Acosta-Rubio is set to open five new churro outlets throughout Florida by April. His 35 Venezuelan stores are under lock and key.

''The losses are gigantic. The franchisees call me every day, they don't know what to do,'' he said from his Brickell Avenue office. ``The business here is going to have to help the businesses there get back on their feet. Thank God for the United States!''

www.naplesnews.com Monday, January 13, 2003 By NEAL LIPSCHUTZ, Dow Jones Newswires

NEW YORK — Pardon this party pooper, but it seems particularly odd that U.S. equity markets finished slightly higher Friday to close off a pretty strong week.

After all, didn't we on Friday get a surprisingly downbeat report on the economy that said about 100,000 jobs were eliminated in December? That figure came in the face of forecasts for a 30,000 job increase. That figure, combined with a revised November jobs number, now means nearly 200,000 jobs fled the scene in the final two months of 2002.

Oh sure, you can talk about seasonal factors and how it affects retail hiring, which was probably soft this year in line with the prescient caution store owners showed given the sluggish holiday shopping season.

You can say there's problems with the numbers because of those seasonal adjustments. The fact is the government data are all we have to work with, imperfect as those figures are. And 200,000 jobs gone in two months is not usually good news for stock market bulls.

Optimism is always a good thing. But it would be a bit more reassuring if there was more tactile support for the buoyancy in spirits of investors this time around. Yes, the President did introduce a tax-cutting package this week that if enacted would, among other things, eliminate investor taxes on dividends. If enacted and over the long run, that should improve interest in the purchase of equities and is therefore bullish.

If enacted and over the long run are the operative phrases of the prior sentence. The tax cut plan, news reports aver, has a tough fight ahead in Congress. Meanwhile, many pundits doubt the near-term stimulating impact of the proposed stimulus plan.

Nothing has brightened on the geopolitical front, the dangers of which have been widely heralded as the cause for the overwhelming caution in the economy and the extended soft spot we are now experiencing.

The hostile words and nuclear worries surrounding North Korea, if anything, grew more ominous.

Nothing happened this week that makes war with Iraq less likely. Any conflict, of course, beyond the real human costs, also opens up endless possibilities for economic problems.

And there's more than Iraq to worry about if you are focusing on oil. Venezuela remains in an apparent twilight zone-style standoff between supporters and opponents of its president. The general strike there is reportedly still pretty much in place and the nation's oil production is way down.

Yes, members of the Organization of Petroleum Exporting Countries have said they will supply more oil and they meet this weekend in Vienna to discuss that issue. But OPEC ultimately works for its own interests, not those of oil consumers, even if it sometimes views those interests over a longer time frame.

Meanwhile, earnings reports for the fourth quarter are about to flood in from U.S. companies. Everyone knows the fourth quarter was weak, so will weak earnings be dismissed by optimistic stock investors as they are reported?

Maybe. There will be a lot of focus, as always, on what companies say about the current quarter, since the future is always more interesting and speculative than the past.

Employment, geopolitics and oil prices are all important. But in the end, its earnings growth that drives stock prices.

So maybe, given the healthy gains in share prices this week, investors are telling us that those earnings are finally about to turn around, if not in the current quarter, than in the next quarter.

Optimism is always a good thing. But it would be a bit more reassuring if there was more tactile support for the buoyancy in spirits of investors this time around.

Neal Lipschutz is senior editor, Americas, Dow Jones Newswires.