Brazil - 8 July 2003

The first public tender of the Lula government has got underway, with the publication of the call for bids for the construction and operation of 1,787km of electrical transmission lines, a project which is set to require investments of some R$1.8bn (US$627m). 

Mines and energy minister Dilma Rousseff said the new transmission lines are designed to add flexibility to the country's national grid. She recalled how, during the period of electricity rationing in 2001, there was actually excess capacity in the south of the country, but it could not be transferred to areas in the south-east suffering shortages for lack of lines. 

One of the seven contracts for which consortia will be bidding, the Londrina-Assis-Araraquara line, is set to solve this problem, completing the process of linking the south and south-eastern regions, she said. 

The auction for the contracts is scheduled to take place on 23 September at the São Paulo stock exchange. The system used for their allocation will be a Dutch auction, with the winner being the company offering the lowest tariff. 

The lines to be constructed are due to come into operation in 2005, with the contracts giving the winning consortia the right to operate them for a period of 30 years. 

A hectic round of consultation between ministers and critics of the government's pension reforms has resulted in the government hinting that it is prepared to compromise. 

Ricardo Berzoni, the social security minister, who is heading the government's negotiations with congress, said that the government may be prepared to compromise on peripheral issues provided the core of the reforms remains untouched. 

By the core, Berzoni said he meant that Brazilians should retire at a fair age. 

The reform proposes to raise retirement ages for both men and women and to insist that public sector workers work for 35 years before becoming eligible for a pension.

The government has announced an ambitious plan to increase the financing of the harvest. There will be R$30bn (US$10.7bn) available to finance the 2003/04 harvest. This compares with R$21.7bn for the 2002/03 harvest and only R$14.7bn for the 2001/02 harvest. The expectation is that the interest rate on the loans will be the same as this year: 8.75%. 

The government points out that it is making agriculture a pivot of its international trade policy. President Lula da Silva pressed for less agricultural protection at the G8 summit in Evian and Brazilian negotiators have been pushing for the US to allow the World Trade Organization to sort out the many agricultural issues in dispute between them. 

The Banco do Brasil has set up two subsidiaries to promote lending to small businesses. One is a bank, Banco Popular do Brasil; the other will be a finance company. 

The bank will aim to lend, and provide other banking services, to people whom the existing banks believe are not worthy of credit. It will be separately capitalised from Banco do Brasil and will aim at serving the informal sector and people on low incomes. The target is to create links with 1m people by the end of 2004. The other subsidiary is a leasing and finance company, which will aim to provide the same sorts of people with access to big ticket items such as vehicles and agricultural machinery. 

Another of the state-owned banks, Caixa Econômico Federal, will halve its monthly interest rates on small loans to poor people (micro-credit) from 5% to 2.5%. It is not yet clear when this programme will start or how much money will be available under it: negotiations about financing it are still going on with the finance ministry. The Caixa expects heavy demand: it pointed out that its simplified account (in which people do not have to prove their income, just their identity), which it launched three months ago, has signed up 200,000 people. This means that it is likely to end up ahead of the target for the first year of 500,000. 

The news that congress has ordered an investigation into what went on in the Banco do Estado do Paraná under the previous government, has alarmed the financial markets. The stockmarket immediately fell by 3%. the country risk premium shot back up through 800, after falling to below 700, and the Real was volatile. 

The fear is that the parliamentary investigation (by a committee of 16 senators and 16 deputies) will lead to political score-settling. This may hold up the government's key reforms to pensions and tax. 

Big money is involved: the federal attorney-general's office and the federal police reckon that US$30bn has been spirited out of the country through Banestado. 

The motor industry had its worst six months for three years. Sales were 647,700 units, 8.2% down on the same period of 2002. In June, sales fell for the fourth consecutive month, to 100,183. The previous worst first half was in 1999 when only 594,000 vehicles were sold. Carmakers are still extending collective holidays to try to clear stocks: the latest to do this was General Motors, the market leader, with about a quarter of the total market. 

Ford, however, is bucking the trend: it increased sales by 22% in the first half to 71,758, thanks to strong sales of EcoSport, the best selling vehicle on the Brazilian market. Ford's market share is now back over 12% for the first time since the end of 1998. 

The government has cut its forecast for Foreign Direct Investment for this year from US$13bn to US$10bn. In 2002 it received US$14bn. If the government forecast is met it will be the poorest year for FDI since 1995. In the first four months of the year FDI was US$2.77bn. 

On the other hand, the central bank has increased its forecast for the trade surplus from US$16bn to US$17.5bn. In the first five months the surplus was US$8bn. In 2002 the surplus was US$13.1bn.