SAO PAULO, BRAZIL — Still reeling from their currency's nose dive, Brazilian plastics industry leaders gathered at Brasilplast'99 trumpeting the only remaining alternatives to stimulate business: substitute imports with local production and resume exporting.
The seventh Brasilplast show took place March 8-13 in Sao Paulo, bringing together 970 exhibitors from around the world and 63,000 visitors. Located next to a busy freeway that overlooks the commerce-hungry city, the Anhembi exhibit hall was the center of Latin America's plastics industry.
Just seven weeks before Brasilplast, the world's eyes were focused on Brazil for a more negative reason. Its currency, the real, withered in value. To investors, it looked like the global financial crisis that hit Asia and Russia was spreading to Latin America through its powerhouse country, Brazil, with 164 million people and a growing consumer class of some 95 million people.
During the 1997 Brasilplast, the real was trading about 1:1 to the U.S. dollar. At the beginning of this year, $1 bought 1.2 reis. On Jan. 13, the Brazilian government suddenly tried a limited devaluation. Foreign investors accelerated their moves to pull money out. After a futile attempt to defend the real with the country's reserves, the government decided to allow the real to float freely on foreign exchange markets, supported only by high interest rates.
The real promptly sank, briefly falling below 2 reis to the dollar. During the plastics show, it stood at about 1.85.
Most plastics industry executives expect the first half of 1999 to be difficult, but they hope for a better second half of the year.
``Any more- specific forecast would be a pure exercise of futurology,'' Merheg Cachum, president of the Brazilian molders association, Abiplast, said during an interview at the show.
Polyethylene maker Polialden Petroquimica S/A of SÃo Paulo has not revised its forecast for the current year and is waiting for the currency to stabilize to do so. Other resin suppliers, especially those whose businesses are linked closely to durable goods such as cars, have changed their goals.
``Before the real devaluation, we were working with a 5-6 percent growth forecast [for the region] this year. But now, we think that business growth will be more like flat,'' said Oscar Groomes, president of SÃo Paulo-based GE Plastics South America.
Firms that were about to make investments simply put their plans on hold. Such is the case of the Argentine molder Conarsa-Contenedores Argentinos SA of Buenos Aires, which spent several months finding a local partner to bring its pallet and bin production business to Brazil. Now, with the deal practically concluded, it has opted instead to sit out awhile.
``Conarsa's Italian partner [Jcoplast srl of Battipaglia] thought it better to take a break until prices in general settle down. Only then will we be able to have a clearer idea of business profitability,'' said Conarsa President Hector Mendez at Brasilplast.
Brazil is in a recession. Its gross domestic product is expected to shrink 3.5-4 percent this year, although the plastics industry typically does better than the overall economy.
Right now, there are two big fears: 45 percent interest rates, which stifle spending and business investment; and inflation, which typically comes after a currency is devalued.
Inflation is a dirty word to Brazilians, who recall living with hyperinflation, in some years topping 50 percent a month, before President Fernando Henrique Cardoso's Real Plan kicked in five years ago.
Once inflation was tamed, tens of millions of low-income people started buying things, from soda to refrigerators.
The Cardoso administration faces a balancing act in deciding when to lower interest rates to spur consumption without sparking inflation, said Antonio L.P. de Castro, a Citibank economist in Sao Paulo.
Under hyperinflation, Brazil faced a never-ending spiral of rising prices, and indexed wage hikes. De Castro said that would destroy Brazil's new prosperity.
``If inflation goes high, there is quite a chance that it could remain high,'' said de Castro, Citibank's Latin America Research Director.
At the trade show, Jose de Santa Rita Vaz, plastics director at BASF AG's subsidiary in SÃo Paulo, said that the situation is one of concern, but not calamitous.
``During the last four years, appliance, automobile, packaging and resin manufacturers like us have invested locally, whereby this entire group came to Brazil for the long haul,'' Vaz said. ``The question is whether the country can put its internal deficit in order soon or if it will take the worst scenario route — that of the 1980s, known as the lost decade — which I particularly do not believe will happen.''
For a long time, analysts from around the world considered the overvalued real one of the most vulnerable points in Brazil's economic policy, said Ivo Gramkow, an economist who is also director of the pipe extruder Tubos e Conexoes Tigre SA of Joinville. The strong real had made it difficult for Brazilian firms to export products, and exposed the domestic market to cheap imports.
``Now that this weakness has been attacked, I see a recessive impact in the short term, due to cost pressures resulting from a more expensive dollar, but also a very positive outlook in the long term,'' Gramkow said. Tigre is the largest plastics processor in Brazil — the company has capacity to process about 530 million pounds of resin annually.
According to Abiplast's Cachum, an exchange rate close to what the government and the International Monetary Fund expect in December — 1.7 per U.S. dollar — would be sufficient for the plastics sector to recover. It also would open doors for expanding exports of plastics products, which totaled $476 million last year, down from $509 million in 1997, Cachum said.
To make this export prospect a reality, representatives from the Ministry of Finance and the Central Bank of Brazil are working to convince foreign banks to increase their lines of credit for exports.
``We will have a healthy substitution of imports generated by an efficient productive chain rather than by import barriers or exchange-rate distortions,'' said Jose Botafogo Goncalves, executive secretary of Brazil's Foreign Trade Chamber of Commerce. Goncalves visited Brasilplast on March 9, when he took part in the second Latin American Congress for the Plastics Industry, held at the same time as the show.
A key challenge to the local plastics industry will be to survive through the current period of high interest rates. The IMF is pushing for Brazil to lower interest rates to 28.8 percent by December.
``The interest rate policy is clearly a correct measure to control the dollar exchange rate and inflation, but shouldn't last for a long period. Otherwise it could cause irreparable damages to the industry,'' said Cleantho Leite Filho, commercial director at Polialden Petroquimica.