(April 7, 9:30 a.m. EDT) — Economist Luciano Coutinho, a consultant and professor who frequently is quoted in the Brazilian press, says Brazil's economy is fundamentally sound, although it has been battered by a soft world economy, Argentina's economic woes and Brazil's energy crisis in 2001. The labor-oriented Workers Party captured the presidency in last year's election, but Coutinho predicts President Luiz Inacio Lula da Silva essentially will follow the business-oriented economic policies of the previous government. Coutinho had been floated as a possible member of Lula's government, but he has no official position.
Plastics News staff reporter Steve Toloken and SÃ£o Paulo-based correspondent Sandra Mara Costa spoke with Coutinho in his SÃ£o Paulo office March 12.
Q: What are your growth projections for Brazil?
A: Most consultants and banks project rather modest growth this year, something between 1.5 percent and 2 percent, which is well below Brazil's potential. That is due to two years of crisis in external account financing, and also an energy crisis in 2001 that created a rather difficult situation for the Brazilian economy. Most analysts would expect a higher growth rate in 2004 and a sustained growth of around 4 percent, 5 percent from 2005 forward.
That figure is now possible because the Brazilian economy had a victory against inflation. ... We have a difficult transition, but inflation will decline over the next coming months. The Brazilian economy has also very good fiscal fundamentals and we are creating a quite solid balance of payments, particularly a large trade surplus, which will sustain the financing of Brazilian external accounts.
So, what does that have to do with plastics? The plastic per-capita consumption is very low. It can certainly increase much faster than the rate of [gross domestic product]. … With GDP growth at 4 percent, the demand for plastics, the use of plastics, will grow somewhat around 8 percent or even higher. … I don't see a very bright prospect for 2003 for the plastics sector. Maybe it will not be as bad as last year, but it's not yet a bright scenario in the short term.
Q: Resin prices are up 80 percent in reais [Brazil's currency] in the past nine months. Obviously some of that is tied to war in the Mideast. How much risk and uncertainty is there in Brazil's plastics sector?
A: I think we are going through a very critical time because of the effect of the oil prices and the Brazilian exchange rate. I think the worst is over. I don't believe the war will have a major impact on oil prices. I would expect it to have some impact, but I would expect it to be a transitory impact.
As far as the Brazilian exchange rate is concerned, the market has already built-in the war effect on the exchange rate. I think the exchange rate is already very undervalued. I don't see much room for further devaluation of the Brazilian exchange rate. … Of course the sector is facing a very difficult current situation because of the whole effect on margins, from costs on one side and on the other side, prices. There is still some way to go in order to digest this price pressure.
Q: Can you give a brief assessment of which manufacturing sectors in Brazil are likely to be stronger and which are likely to be weaker?
A: In the near term, I think the durable-goods area will not show very strong performance because of very high rates of interest. The auto sector, also appliances, TV, audio and video, will show a rather moderate increase this year. They are of course heavy users of plastics. Basic consumption will grow very modestly. I don't see a very strong growth of final demand this year. However, I would see that by the end of 2003 demand will start to pick up and in 2004 demand can be much faster. Of course this whole scenario depends on a relatively good scenario for the world economy. If we have a major crisis in the U.S. economy, forget about this scenario.
Q: Do you see the Lula administration following essentially the economic policies of President Cardoso and the previous administration?
A: Not precisely the same policies, because Fernando Cardoso did very little in terms of planning, in terms of reorgan-izing the Brazilian infrastructure, in terms of creating conditions for export policies. I think the government is being rather slow in doing that, but is moving in the right direction.
The administration inherited very big crises in many sectors that were just pushed forward by the former administration … in electricity, in commercial airlines services, in other sectors. The Lula administration is overburdened with having to digest those big problems and move forward toward organizing better development policies. I see the combination of an orthodox macroeconomic situation: There is no escape from that; President Cardozo left the Brazilian economy under a program of the [International Monetary Fund], with a high dependence on foreign funds. There is no way to overcome that.
Q: Inflation and interest rates are critical issues to the industry. What is your scenario for them?
A: I think there might be some short-term pressure on oil and maybe some extra pressure on the exchange rate — not much but some — that would call for further increases in the interest rate because of inflation. Consumer inflation is now around 15 percent per year, which is too high. The whole policy has to reverse that trend toward 11 or 12 by the end of this year. The challenge to do that requires a tight monetary policy for a few months ahead. This is part of the job. The basic interest rate is 26.5 [percent]. It could go to 27, 27.5. … The exchange rate is helping right now because many analysts are starting to reclassify the Brazilian position in a positive way. Brazil's country risk is declining slowly.
Q: During the last Brasilplast [in 2001], the industry talked about wanting to develop a trade surplus in plastic manufacturing and plastic products. It doesn't seem like it's been able to do that.
A: Brazil exports most of its plastics to other South American countries, which are not in good shape right now, particularly Argentina. There is little room for a big correction of that deficit. This is a long-term challenge that has to do with the improvement of the competitiveness, improvement of quality, improvement of technology, improvement of management and improvement of scale of the Brazilian plastics industry. We have a long way to go.
Q: How does Brazil view potential free-trade agreements with the United States and the European Union?
A: We have to view it with a lot of caution because we get very little. The immediate areas in which Brazil is highly competitive, the United States has very high nontariff barriers, related to sugar and alcohol, steel [and] orange juice. That doesn't really depend on a tariff reduction.
If you ask us to accelerate our tariff reductions, Brazil would open up without any compensatory gain. I think there is a long way to go in those negotiations. They will be very tough. I don't see this as an ideological thing. I see it as a purely practical thing, trade gains vs. losses that have to be negotiated.
Q: Do you think they can be completed by 2005, as planned?
A: I'm not very optimistic. The negotiations will depend on the [World Trade Organization] negotiations.
The key questions for Brazil, like access to the agricultural goods sectors, and anti-dumping, particularly in the case of steel, cannot be negotiated in the realm of a [free-trade] agreement. They have to be negotiated on a multilateral basis. … I think it is optimistic to say [the negotiations will be completed in] 2005 or even 2006. I hope I'm wrong, because I think those negotiations can be good for both sides if they are tough, if they are practical.