Indian Trade Promotion Organization

Economic and Commercial Report , 2004

Brazilian economy fared well during the year. President Lula's prudent economic team made up of Finance Minister Palocci and Head of the Central Bank Meirelles followed tight fiscal and monetary policies, resulting in significant lowering of Brazil's country risk, remarkable strengthening of the Real against the Dollar, significant build up of foreign exchange reserves and unprecedented success on the export front. During the year Brazil registered a record trade surplus of US$ 33.69 billion. The only minus point was the high inter-bank landing rate at 17.75% per annum at the close of the year which was often criticized by opposition parties and even by some members of President Lula's own Party as an obstacle to economic growth. Still Brazil's GDP growth during the year improved dramatically from a mere 0.5% in 2003 to more than 4%. Brazil's economic management during the year received praise from financial institutions like the IMF .The major economic developments during the year were as follows:

The Selic Rate (Inter Bank lending Rate) remained high during the year. This was often, criticized by the business community as the main reason stifling economic growth. The year
began with the rate of 16.5% per annum and ended with 17.75% per annum. The central bank argued that maintenance of high interest rate is necessary to keep inflation in control. (The rate has been since hiked to 18.25% it1 January 2005).

RECORD TRADE SURPLUS

Brazil ended 2004 with a record trade surplus of US$33.69 billion, a 35% increase over the 2003 surplus of US$24.8 billion, the previous record. The country's exports last year were helped by a strong world economy benefitting particularly from high international prices for Brazilian commodities such as iron ore, sugar, soybeans and coffee. The booming Chinese economy helped raise Brazil's iron ore exports to that country. Brazil's exports in 2004 totalled US$96.4 billion, up 32% from 2003, versus imports of US$62. 7 billion, an increase of 30% from 2003. Both exports and imports set all-time records for the country. Exports were led by the category of transportation equipment whose overseas sales soared 50.9% to US$ 16 billion. The category includes airplanes, auto vehicles and auto parts. Export of manufactured goods jumped 33.5% in 2004 to US$52.9 billion, accounting for 53.9% of Brazil's total exports. Sales of basic goods improved 34.7% to US$28.5% billion while shipments of semi-manufactured goods rose 22.7% to US$13.4 billion. Brazil in 2004 recorded its first trade surplus with Argentina since 1994. Exports to Argentina jumped 61.7% to US$7.37 billion while imports rose 19.3% to US$5.57 billion, producing a surplus of US$1.8 billion. With Argentina now recovering from its economic downturn, the country last year resumed its position as Brazil's number two export market, after the USA. Exports to the American market increased 20.4% last year to US$ 20.3 billion. Holland was Brazil's number three market with exports of US$5.9 billion, an increase of 39.3%, followed by China, (US$5.4 billion), up 20%, and Germany, (US$4 billion), up 28.7%. In terms of regions, the European Union was Brazil's leading market with exports of US$24.1 billion, an increase of 30.9% from 2003. Exports to the MERCOSUR soared 57.1% thanks to the Argentine recovery, sales to the Middle East rose 31.4% and exports to Asia improved 24.7%.

FINANCE MINISTER DEFENDS ECONOMY POLICY IN SENATE APPEARANCE

Finance Minister Antonio Palocci defended government's tight economic policy in a marathon appearance before the Senate economic committee on March 30. In six hours of testimony, Palocci stated that the government would not abandon the pillars of its economic policy. He stated that had the government not adopted austere fiscal and monetary policies in 2003, inflation would have run out of control. He also defended the government's 2004 target of a primary surplus equal to 4.25% of GDP. (This was subsequently raised to 4.5% of GDP). His appearance was in response to the frequent criticism by opposition and by some members of his own party that Government's tight fiscal policy, particularly maintenance of high interest rates in order to control inflation, were stifling economic growth

On September 22, President Lula approved an increase in primary surplus target from 4.25% of GDP to 4.5% for the year 2004. President Lula made his decision during a meeting with Finance Minister Antonio Palocci, Planning Minister Guido Mantega and Cabinet Head Jose The decision to raise the primary surplus targets reflects economic team's strict adherence to tight and austere fiscal policy.

Pushed by record exports and the recovery of domestic consumer demands, the economy
expanded by a robust 6.1% in the third quarter, the best result since 1996. The government's statistics bureau, IBGE, announced that the economy expanded by 1% from the second quarter and 6.1% versus the third quarter of 2003. For the year, the growth rate at the end of September was 5.3% compared with the same period last year, the largest expansion since 1995. The economy began to expand in the second half of 2003 when Brazil emerged from an incipient recession. Last year's growth, however, was only 0.5% according to revised figures for 2003 released by IBGE. In the first semester of 2004, the growth rate accelerated, pushed primarily by exports. But starting in the second quarter and quickening in the third quarter, rising domestic consumer demand became an increasingly important factor in the economic expansion. In the third quarter, industry expanded 2.8% from the second quarter, the sixth consecutive quarter to register growth. Industry's strong performance was enough to compensate for a 3.6% decline in the quarter's agricultural output. The services sector expanded 0.7%. Compared with the third
quarter of 2003, industry expanded 7%, agriculture 4.9% and services 4.7%. Family consumption, meanwhile increased 1.4% from the preceding quarter and 5.7% year-on-year, the highest result since 1997.

On December 16, in a meeting with labournleaders, President Lula announced that he has decided to raise the minimum salary to R$300 per month effective from May 2005. This will amount to a real increase of 9.78 in the minimum salary from the present R$260 per month.

Unemployment in Brazil's six largest metropolitan areas remained largely stable in November, at 10.6% versus 10.5% in October. The average salary earned by workers in
November increased 2.6% versus November 2003, the third straight month to register salary gains. In Sao Paulo, the Seade Foundation and Dieese announced that unemployment in the metropolitan area fell in November from 17.6% in October to 17.4%. The services and retail sectors added 53,000 workers in November while industry reduced its work force by 5,000.

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