Brazil Fights Recession with Investments AS/COA Online 01/27/09

Brazil announced a sharp rise in Petrobras investments. (AP Photo)

Brazil began 2009 facing deteriorating economic conditions and rising unemployment. But, through recent actions, the Brazilian government seeks to steer the economy into safer waters by committing billions of dollars to create jobs and propel Petroleo Brasileiro (Petrobras) into the heavyweight category of oil production companies. Furthermore, U.S. President Barack Obama signaled his interest to work with Brazilian counterpart Luiz Inácio Lula da Silva to move forward on biofuels and the Doha round of global trade talks. Lula will visit Washington to meet with Obama in March.

With the goal of jumpstarting the ailing economy, Brazil’s Central Bank reduced its overnight lending rate by a full percentage point to 12.75 percent on January 21. The move intended to stimulate economic activity at a moment when financial markers signaled the danger of recession; private consumption has shrunk, December job losses hit their highest level since 1999, and analysts predict GDP growth may not reach the 2 percent mark in 2009. The Economist Intelligence Unit’s ViewsWire augurs that industrial growth could be close to zero and private consumption may drop to 0.9 percent in 2009—down from 6.2 percent last year. The analysis applauds the cash infusion of more than $42 billion into the Brazilian Development Bank (BNDES), designed to stimulate the creation of new employment. The fund helped create 2.8 million jobs in 2008 alone, according to BNDES data. “The businessmen who used to shop for funds on the international market and are not managing to obtain capital due to the financial crisis will be able to resort to the BNDES,” said Brazilian Finance Minister Guido Mantega last week.

In tune with the government’s actions, Petrobras unveiled a plan on January 23 that promises a 55 percent expenditure increase over the next five years. The package includes investments of more than $174.4 billion, with $28 billion alone to finance exploration of recently discovered pre-salt oil fields. The company also hopes to double its total oil and natural gas output by 2015, counting on the Tupi oil field and three other offshore camps to begin production. The day after the plan’s release, the first fully Brazilian-made natural gas platform, with capacity to generate electricity for 300,000 people, started operations. This also marks a step forward for Brazil’s naval industry, which will build another eight platforms to be deployed by 2013.

Washington’s new administration has signaled interest in working with South America’s largest economy this week in the fields of energy and trade. Following Monday’s phone conversation between the presidents of both countries, a spokesperson from Lula’s office announced that Obama “is interested in continuing discussions to advance the Doha round” of trade negotiations. In his January 26 edition of his radio show, “Café com o Presidente”urged Obama to push Doha forward.

A new report by AS/COA’s Trade Advisory Group entitled Building the Hemispheric Growth Agenda: A New Framework for Policy proposes creation of a hemispheric energy partnership that would include Brazil: “[A]s a starting point to greater regional integration, the United States and other willing partners across the hemisphere, perhaps as an E4 or E5, should join together to formulate a mutually beneficial hemispheric energy agenda roughly analogous to the original European Coal and Steel Community.” The report also suggests that the new U.S. administration should scrap the 54 cent-per-barrel tariff on Brazilian ethanol and consider a pact for a civil nuclear program similar to the one signed with India during the Bush administraion.

A December AS/COA panel analyzed the investment climate for energy in the region, with an emphasis on Brazilian energy and Latin American integration.

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The Americas 2008: A Year in Retrospective AS/COA Online 12/23/08

View a slideshow of the most compelling events in the hemisphere. Also, read an article by AS/COA Online Managing Editor Carin Zissis on the most riveting events affecting the Americas in 2008.

Click the image to watch the photo gallery.

Latin America Bets on Infrastructure AS/COA Online 10/02/08

Latin American integration project bridge connections in the region. (AP Images)

At a time of global financial insecurity, Latin American countries have deepened economic ties through a series of large-scale infrastructure project connecting countries and oceans. While political integration also grows through multilateral organizations such as the Union of South American Nations and Mercosur, another sign of stronger bonds rests with governments’ demonstrated willingness to pledge billions and partner with neighbors to bring major construction projects to fruition.

Brazil stands as a leader on spearheading such infrastructure projects, shown by two mega projects through which it can gain access to the Pacific Ocean. In partnership with Ecuador, Brazil launched the $2 billion Manta-Manaus project that includes highways and waterways and stands as a transportation alternative for the busy Panama Canal. At the same time, the governments of Brazilian President Luiz Inácio Lula da Silva and his Peruvian counterpart Alan García will oversee a project connecting Peru’s southern ports of Ilo, Maratani, and San Juan de Marcona with Brazil’s Rio Branco and Madeira River’s Porto Velho. As the Economist notes, these stronger ties come with another benefit for Brazilian firms: By producing sugarcane-based ethanol in Peru, the Brazilian ethanol industry can take advantage of Peru’s free-trade agreement with Washington to tap into the U.S. market, which remains elusive for Brazilians due to a hefty import tax.

A September 30 summit in the Amazonian city of Manaus brought together the leaders of Brazil, Ecuador, Venezuela, and Bolivia to discuss how to connect Caracas and La Paz via highway with the infrastructure projects underway with Peru and Brazil.

Projects are also flourishing in the Caribbean and Central America. Colombia, Panama, and Venezuela recently announced a new venture called Gran Ruta de las Américas, a road that will allow Central American visitors to drive to Cartagena and further east into Venezuela.

Energy cooperation serves as another fertile area for cooperation, with viability studies underway to lay down an underwater power distribution line that would enable Colombia to sell electricity to the Dominican Republic and Puerto Rico, reports El Listín Diario. Colombian President Álvaro Uribe underscored his commitment to the project during his visit to Santo Domingo in August, when he promised “energy of good quality at low prices.”

Further south, a pipeline plan could allow Bolivian natural gas to flow through northern Argentina, benefiting businesses and millions of families by delivering the energy source directly rather than forcing people to buy gas tanks. Controversy over who should pay for the gas lines leading from the main pipeline to the municipalities delayed some portions of the project. In response, the Argentine government pledged funds for most of the secondary distribution lines with the goal of reaching the project’s expected 2010 completion date.

Aside from growing connections between neighbors, countries also improve their competitiveness with pivotal infrastructure projects undertaken within their borders. For example, Mexico created a national fund to channel more than $240 billion into infrastructure over the next five years. Futhermore, the proposed giant port in Punta Colonet in Baja California could snatch a good portion of the cargo coming from Asia, easing the burden on strained ports of Los Angeles and Long Beach in California.

The long-held goal of expanding ties through infrastructure gained a lift in 2000 when 12 South American countries created the for Integration of Regional Infrastructure in South America, which coordinates several multinational initiatives and gained the backing of the Corporación Andina de Fomento and the Inter-American Development Bank. For more information, reports, and statistics about Latin American integration, visit the Latin American Integration Association.

On September 5, AS/COA hosted a panel on strategic infrastructure in Latin America, highlighting the opportunities to close the infrastructure gap in the region and reviewing the outlook of projects funded by the public sector and public-private partnerships.

During the week of September 22, AS/COA hosted its annual Presidents of the Americas series, when several presidents discussed deepening integration in Latin America. View summaries and access audio/visual of their remarks.

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Defying the Downturn AS/COA Online 05/12/2008

São Paulo’s Bovespa. Brazil earned investment grade in late April. (AP Images)

With first quarter indicators showing positive signs for much of Latin America, analysts continue to posit that the region appears prepared to decouple from the U.S. recessionary cycle. Still, concerns remain, demonstrated by mixed reports. The UN’s Economic Commission for Latin America and the Caribbean trumpeted the record $106 billions in foreign direct investment (FDI) funds attracted by Latin America in 2007—a 46 percent increase over the previous year. Yet the agency also lowered its forecasted 2008 growth for the region to 4.7 percent from 4.9 percent, pointing out that the U.S. slowdown is one of the main factors driving economic uncertainty in the region.

Several Latin American countries gained important markers of confidence. At the end of April, Standard & Poor’s (S&P) awarded Brazil investment grade status  (BBB-). The rating opens the door for large pension and insurance funds to invest in the country. Brazil also attracted record levels of FDI in the first quarter of 2008, which hit $8.8 billion and marked a considerable increase of 33 percent compared to the same period in 2007.

Other rating agencies like Moody’s and Fitch may grant investment grade to Brazil as well, according to Latin Business Chronicle. But Brazilian economic expert Thomas Trebat, writing for the Latin American EconoMonitor blog, warns that besides the euphoria for Wall Street’s confidence vote on the Brazilian economy, investors still need to be cautious; an oversized public debt remains well over 40 percent of GDP and commands high interest rates for domestic debt. A Financial Times commentary opines that investment grade achievement “should not be regarded as an excuse for political complacency.”

Peru has also taken the stage as a Latin American economic maverick, gaining investment grade in April from Fitch with S&P expected to follow suit. Speaking at the COA’s annual 38^th Washington Conference on the Americas, Peruvian Finance Minister Luis Carranza Ugarte highlighted the country’s impressive GDP growth. But social inequality and poverty levels remain high and threatens Peru’s economic growth. “Only through poverty reduction will we be able to consolidate our democratic system,” said Carranza. In a recent column, the Wall Street Journal’s Mary Anastasia O’Grady takes a closer look at uneven growth across Peru. Comparing globally competitive Lima to the Amazon’s Iquitos, she says that the difference in the two cities’ level of development exemplifies “what makes Peru ground zero in the continental struggle between modernity and atavistic socialism.”

Other countries in the region have shown positive signs of standing up to a global downturn, though warnings of slowing growth persist. Chile earned a reason to rejoice when its sovereign funds rated eighth in transparency and good practices among 34 countries. “[P]ractically all funds of emerging countries are below Chile’s rating as per transparency and accountability. We take that as good sign,” said the Chilean Finance Minister Andrés Velasco in late April. A Scotiabank Bank Group report (PDF) expresses confidence in Mexico’s ability to withstand the slowdown of the U.S. economy. It also forecasts a slower but solid economic performance in Colombia while highlighting worries about Venezuela’s inflation woes and shrinking confidence in Argentina’s economic policies. The International Monetary Fund estimates that Latin America’s economy will grow only 4.4 percent in 2008 and only 3.6 percent in 2009.

Speaking at COA’s annual Washington Conference, IMF Managing Director Dominique Strauss-Kahn emphasized that sound fiscal policy has underscored Latin America’s most sustained economic expansion since the 1970s.

Read the article as originally published  at the AS/COA website.