ECONOMIC STABILITY LURING WARY INVESTORS

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SO PAULO, BRAZIL — Brasilplast '97 took place against a backdrop of apparently controlled inflation, creating an optimistic scenario for the Brazilian plastics industry.

On the other hand, a two-year trade deficit still creates uncertainty among new investors in the country.

Business interests see the current control on inflation in Brazil as the principal cause of the economic stability the country is experiencing. According to economic analysts from SÌo Paulo University, Brazil is expected to have 7 percent inflation in 1997, compared with 10 percent a year ago, 23.2 percent in 1995 and 873.5 percent in 1994.

The fight to curb inflation has been the main goal of the economic plan — called Plano Real, or the Real Plan, named after the country's currency, the real. The plan was set up during President Itamar Franco's term in 1993 and has continued under President Fernando Henrique Cardoso since 1995.

The plan has been the most successful program to contain chronic inflation in Brazil during the past 30 years. Some of the plan's key points include free negotiation for wages, prices and contracts, pegging the local currency to the U.S. dollar, high interest rates to control consumption, and controlled imports to supply the domestic market.

Cardoso also is trying to balance Brazil's budget.

As a result of reduced inflation, Brazil's 157 million inhabitants have increased their purchasing power, extending consumption possibilities to products that include plastics.

The Brazilian chemical and petrochemical industry association, ABIQUIM, estimates that the per-capita consumption of plastics has grown from 27 pounds in 1994 to 32.3 pounds in 1995 and 35.2 pounds in 1996.

``The population has increased its quality of life and started to buy more food, cleaning products, cars, TVs and refrigerators, as well as to remodel homes. All these items affect the plastics industry,'' said Carlos Mariani Bittencourt, ABIQIUM's president.

Merheg Cachum, president of the Brazilian processors' organization, ABIPLAST, said the plastics products industry is maturing and presenting sustainable growth. He said it accounted for about 1 percent of Brazil's gross domestic product in 1996, which was about $752.4 billion.

According to ABIPLAST data, which only takes into consideration thermoplastic commodities and PET, processors registered total sales of $6.6 billion last year, roughly 9 percent higher than 1995. Expected sales for 1997 are $7.5 billion.

Cachum estimated that the plastics processors sector in Brazil employed 171,176 last year at 5,187 plants. Processors operated at 85 percent of capacity.

On the other hand, local resin producers worked at nearly full capacity last year, producing about 6.39 trillion pounds, Mariani said. Brazilian processors consumed about 5.51 trillion pounds of resin in 1996, 9.6 percent more than a year ago, and sales totaled $3 billion.

``Growth this year is expected to reach between 6 and 8 percent,'' predicted Jean Daniel Peter, president of the synthetic resin manufacturers union of SÌo Paulo, SIRESP.

To serve this increasing demand, almost all resin producers in Brazil are investing in expansions or new plants.

The privatization program, another key aspect of the Real Plan to reduce the public deficit, has been virtually completed in the petrochemical arena.

Since 1992, the three raw materials complexes and almost all resin companies have been privatized, except for low density polyethylene producer Petroqumica Triunfo SA, which has been put on hold due to pending legal matters between the partners. The petrochemical privatization has yielded roughly $2.7 billion to $3.7 billion in income and $1 billion of reduced debt.

In the machinery sector, the domestic industry produced 5,300 machines last year, compared with 5,380 a year before and 4,030 in 1994, according to Daniel Ebel, president of the national department of machines and accessories for the plastics industry, DNMAIP. Sales reached $434 million, against $457 million in 1995 and $404 million a year before. Ebel could not provide specific figures per processing area.

``Business was weak during the first semester, as a consequence of the high sales registered during the year before. In addition, importing of equipment got stronger, taking away 5 percent of business from local producers,'' Ebel said.

He could not provide information about the amount or units of plastics machinery that have been imported to the country in the past two years.

The small exchange difference between the U.S. dollar and the real ($1 equals about R$1.06), coupled with an open-market system, has caused an increase in imports and decrease in exports. As a result, the Brazilian trade balance posted a $5.54 billion deficit in 1996. That is the second year in a row the balance has shown a deficit, which amounted to $3.16 billion in 1995.

The problem is considered one of the most critical issues to be solved to maintain economic stability. In addition to balancing trade, Cardoso's biggest challenges are administrative and fiscal reforms.

Since the beginning of the year, the Brazilian legislature has been working to amend the constitution to allow elected officials to run for a second term. The next presidential election will occur at the end of 1998.

The international community is optimistic about the possibility of having Cardoso for another four years, which would be viewed as a guarantee that the Real Plan would continue, reinforcing investment projects of foreign firms.

The automotive sector is representative of this atmosphere, with large corporations such as General Motors, Audi/Volkswagen, Renault, Chrysler, Mercedes-Benz, Honda and Toyota announcing the opening of nine new plants in the country by 2000.