Economic Indicators for Mercosur

Country	Population (in millions)	Area (in millions sqare meters)	GDP 2002 (in US$ billions)	Foreign trade 2002 (in US$ millions)			Balance of transactions (in US$ millions)
				Exports	Imports	Balance
Argentina	36,2	2,8	99,0	25,352	8,988	16,364	8,988
Brazil	172,0	8,5	446,2	60,362	47,219	13,143	-7,696
Paraguay	4,2	0,41	5,7	951	1,520	-569	-294
Uruguay	3,4	0,18	12,3	1,861	1,964	-103	261
Bolivia	8,1	1,1	7,7	1,319	1,745	-426	n.a.
Chile	15,0	0,76	66,4	18,300	15,800	2,500	600
Peru	25,2	1,29	57,7	7,300	7,500	200	n.a.
Total	254,1	15,04	695,0	115,445	84,736	31,109	659

Since the Brazilian economy recovered quite fast from the 1999 devaluation crisis and already presented a significant growth in 2000, everyone was led to believe that the largest national economy in Latin America had returned to a stable growth. In the following years, however, internal and external factors prevented a longer-lasting recovery period. In 2001, the energy crisis, the political and economical collapse in neighboring Argentina, as well as the beginning of an international conjunctural contraction resulting from the terrorist attacks on September 11th dampened the economic recovery. In the election year 2002 the conjunctural situation worsened once again. The lack of trust the financial markets had in the country's future capacity due to the probable victory of the Labor Party's presidential candidate, Luiz Inacio "Lula" da Silva, led to turbulence in the exchange rates, to an increase in the interest rates, and consequently high inflation, not to mention the decline in consumption and investments by consumers and enterprises, respectively.

Through the continuation of a market-oriented economic policy, courageous cuts in the budget, an uncompromising battle against inflation and the presentation of decisive structural reforms, the new President Luiz Inacio "Lula" da Silva quickly turned the negative expectations of the financial markets into positive ones, right after his inauguration on January 1st, 2003. The national currency, the real, regained value, the interest rates on foreign loans fell below pre-crisis levels, and due to the granting of two government loans, Brazil returned to the international capital markets.

Although 2003 will still close with rather slow general growth patterns, there were more indicators in the 3rd quarter that the Brazilian development will soon restart. The year 2004 should bring a decisive reversal in trend and introduce a significant economic upturn.

Gross Domestic Product

The new government under President Lula's leadership surprised nearly everybody by following a strict stability policy since its inauguration. In the first months in office, it was able to control indicators that had been dangerously out of balance, such as the inflation rate, the foreign exchange rate and the country risk ratings. However, the Brazilian scenario is still affected by the results the lack of trust and the currency devaluation played in the election year 2003. The intensification of the austerity policy and the restrictive monetary policy, which were necessary to restore confidence in investments and stabilize the currency, slowed down growth in the first semester of 2003. So far, the modest growth of the gross domestic product (GDP) shown in the first semester was mostly sustained by the extraordinarily dynamic export development and the booming agriculture.

The still high interest rates, despite repeated reductions of the benchmark interest rate Selic, the population's loss of buying power due to inflation and the only moderate salary adjustments do not allow for a far-reaching development of the domestic demand in 2003.

The weak private consumption (end consumer) has a particularly negative effect on the retail trade of durable consumption goods. Retail sales publications for the first half of 2003 indicate, however, that consumer confidence is slowly being reestablished.

Thanks to the reduction in the interest rates performed by the Central Bank and the decrease in inflation, the private consumption should recover in 2003.

The same also applies for the enterprises investment activities that in the first semester were very cautious in regards to new acquisitions. But here there are also signs of a revival that indicates an increase in the investment activities until the end of the year.

All these factors probably will allow the Brazilian GDP to grow only by moderate 1.5% this year. Should the prices and the foreign exchange rate stabilization be successful in the long run, opening space for further interest rate reductions, then the Brazilian economy might pick up speed and grow by about 3.5% in 2004. If the Brazilian government sets the course properly in terms of the economic policy and if the world economy recovers, then a path for a longer-lasting period with high growth rates could be opened.

Despite the currency devaluation, with a gross domestic product of US$ 456.5 billion, Brazil is still one of the ten largest national economies of the world. Almost 60% of the net product is allotted to the so-called Southeast, one of the five largest regions, which includes the states of Sao Paulo, Rio de Janeiro, Minas Gerais and Espirito Santo. The state of Sao Paulo alone produces almost 35% of the Brazilian GDP. 300 of the 500 largest Brazilian enterprises have their headquarters in the Greater Sao Paulo, the state's capital.

However, in the last few years it has become visible that there is a tendency for the economic power to slightly decline in the Southeast. Numerous companies are increasingly opening or transferring their production sites to the country's South, Mid-West and Northeast regions.

Several branches of industry, including the short-lived consumption goods, the petrochemical and automotive industry, are establishing their facilities in those regions because there they find cheaper labor and better production conditions (for example, tax benefits, lower land prices or investment aids). Also, the southern states are the ones that profit from the process of economic integration brought by the MERCOSUR, which favors the execution of projects in the southern part of the country.

In 2002, the processing industry produced about 22% of the GDP. Aside from the basic industries (steel, petrochemistry, aluminum production, cement and fertilizers), the manufacturing of motor vehicles, the electro-electronic industry, the aircraft construction, mechanical engineering, and the chemical, textile and leather industry are Brazil's most important branches of industry. Due to the market opening in the 90's the industry sector was widely modernized and today can even stand international competition. Also, through a comprehensive privatization program the government's participation in the economy diminished considerably.

The agricultural sector contributes with about 8% to the GDP. In addition to export, agriculture is today the success story in Brazil. In 2002, a new record harvest was brought in. For 2003, another maximum value with a harvest of over 115 million tons, which would represent an increase of 19% compared to 2002, is expected. The agricultural segment is responsible for 25% of Brazil's total exports. Right after coffee, cocoa, sugar, soy, orange juice, chicken meat and tobacco are the country's most important agricultural export products.

The mining industry contributes with about 3.5% to the GDP. Brazil has many mineral resources and is the world's biggest exporter of iron ore.

Contributing with slightly more than 60% to the Brazilian GDP, the service industry holds the largest participation. In addition to the financial sector, particularly the telecommunications segment has had a boom in the last couple of years, as a result of the restructuring and deregulation processes, which occurred between 1997 and 1998. Due to elevated private investments in the IT- sector Brazil has today the most advanced information technology in South America.

Per Capita Income

Brazil's stagnated economical situation in the 80's caused the yearly per capita income to experience almost no real increase until 1995. On the other hand, the turning to a stability policy through the concept introduced by "Plano Real" and the corresponding political-economic measures led to a significant increase in people's buying power, which in 1997 for the first time brought a national per capita income of more than US$ 5,000. Due to the repeated devaluations of the real, the per capita income - expressed in US$ - has been steadily declining since 1999. In 2002, it came to only a bit more than US$ 2,800. That means that it was clearly below the Mexican (US$6,200) and Chilean (US$ 4,100) levels.

Aside from a thin upper class, Brazil has a relatively broad middle class for the South American standards. In the Federal District Brasilia, the yearly per capita income is more than US$ 5,500 and in the state of Sao Paulo more than US$ 4,600, by far the higher ones in the country. In Rio de Janeiro it amounts to about US$ 3,900, in Rio Grande do Sul to about US$ 3,300 and in Minas Gerais and Parana to about US$ 2,800, respectively.

Inflation and Exchange Rates

Since Brazil abandoned its dollar-peg in January 1999, the exchange rate of the real to the North- American currency was exposed to several strong fluctuations. Particularly in the period from June2002 to the first semester of 2003 the real went through a rollercoaster. While in June 2002 the exchange rate to the US-dollar was still at 2.80 reais, in the period that encompassed the run-up to the elections until the election of the new President it increased to almost 4 reais per US-dollar. After several ups and downs of the exchange rate fluctuations, as of spring 2003 the Brazilian currency has registered constant revaluations. In September 2003 the real fell back to below the 3- US-dollar limit and this positive development is a consequence of the restrictive monetary-fiscal policy that has been pursued by the government ever since its inauguration, when president Lula finally managed to convince financial markets and investors.

The exchange rate turbulences also affected the development of inflation. For the first time, the consumer price index IPCA (Indice de Preços ao Consumidor Amplo) reached a two-digit figure —12.5% in 2002. Imports, whose prices had gone up significantly due to the currency devaluation and US-dollar-dependent electricity and fuel tariffs forced prices up.

In 2003, the government and the Central Bank were able to control inflation. Since February, price increases have clearly been reversing trend, and in June the IPCA even indicated a deflation. Therefore, the Central Bank had enough leeway to reduce the benchmark interest rate Selic four times in a row in mid 2003-from 26.5% to the currently 20% per year. Thereby, it expects significant positive impulses for the Brazilian scenario.

As a consequence of basic effects from fall 2002 the inflation rate for 2003 will probably close at a two-digit value. In 2004 the IPCA-index should be 6.5%.

Direct Foreign Investments

For years Brazil has been considered one of the most preferred destinations for foreign investments. Only between 1997 and 2002 almost US$ 145 billion flew into the country. The continuous liberalization of the economy, the participation in the economic agreement with Mercosur and the comprehensive privatization efforts during the last few years led to an increased interest in Brazil as an investments location.

With almost US$ 33 billion in direct foreign investments, the year 2000 has scored a record so far. Because of that, Brazil once again belongs - as in 1999 - to the group of the ten main recipient countries of foreign investments. Among the emerging markets, besides China/Hong Kong and Mexico, Brazil is one of the most preferred destinations of international investors.

In 2001 and 2002 foreign investment flows slightly slowed down. In 2002, direct foreign investments(US$ 16.6 billion) dropped by about 26% in comparison to the previous year. However, considering the almost concluded privatization phase in Brazil, the weak conjuncture of the global economy and the globally declining direct investment flows, this foreign engagement can still be considered significant.

Since the global investment environment diminished its pace once again in 2003, this year Brazil will probably receive only about US$ 10 billion in direct foreign investments. An influx of US$ 13 billion is expected for 2004.

In 2002, the USA had to hand over its longstanding leading position as the most important foreign investor to the Netherlands. In the entire year, about US$ 3.4 billion flew from this middle European country to Brazil (USA: US$ 2.6 billion). Compared to the previous year, the Spanish investments experienced the biggest deficit since they went from US$ 2.8 billion (2001) to US$ 0.6 billion (2002).

In the service sector, the main objects of direct foreign investments were the areas of telecommunications, energy and financial industry, and in the industrial sector these investments were geared to motor vehicles, food and beverages, and chemicals.

Job Market

The current weak conjuncture reflects on the job market, which since 2001 shows to be very tense. The official unemployment rate went from 6.2% (yearly average 2001) to 11.1% in 2002.

In the first semester of 2003 unemployment rates continued to grow. A similar average to that 2002 is expected for the entire year.

Unemployment did not only increase due to the weak economical development. Another reason is the sharp increase of the employable population in Brazil. Because of the demographical development there are more employable people pushing on the job market than job openings are created.

With an attractive situation the perspectives for the job market should become less tense in 2004.

Since the official indicators do not consider the informal job market we can assume that the actual unemployment in Brazil is considerably higher.

The average monthly real income has been dropping for a couple of years. In April 2003 it was R$ 857. At the beginning of the year, as one of its first actions the new government increased the monthly minimum wage from R$ 200 to R$ 240.

Foreign Trade

Right now, there is no other area that experiences such a booming phase as the Brazilian export sector. Although Brazil's global share is only about 0.8%, the country is working at full stretch to build an export culture. Not only the Brazilian government, but also the entrepreneurs realized that foreign markets can bring in foreign currency and offer a commercial balance regarding fluctuations in the domestic market.

In 2001, for the first time since 1994, the Brazilian foreign trade was able to close with a surplus. Due to the fact that while in the 80's and early 90's the trade balance showed an export surplus, a trade balance deficit has been developed since 1994 as a consequence of the political-economical reorientation. The opening of the economy (liberalization of import regulations and reduction of import duties) and additionally the policy practiced by the Brazilian Central Bank to overrate the national currency have also contributed to this result. If on one hand exports increased steadily/ on the other imports grew rapidly. Even the gradual devaluation of the real by 0.6% per month since 1995 could not avoid a trade balance deficit until 1997. This development only stopped once the economical growth slowed down. In 1998, a decrease of the deficit could be observed for the first time, and continued in 1999, turning into a surplus in 2001.

Aside from the mentioned new export culture/ Brazil is currently profiting particularly from last year's strong currency devaluation and the rising prices of international raw material. Thanks to these factors, the country was able to close 2002 with an export surplus of 3.7% and total exports in the amount of almost US$ 60.3 billion. With total imports of US$ 47.2 billion the trade balance surplus came to impressive US$ 13.1 billion.

In 2003 the good export scenario has also been maintained. In the first semester, the export of goods had increased by more than 20%. Since there has been a clear revaluation of the real in relationship to the US-dollar, this value will probably not be sustainable until the end of the year. However, with an estimated value of US$ 68.7 billion, new record proceeds might be achieved, which in turn should be surpassed in 2004 with a forecasted US$ 72.1 billion.

Brazil also owes the export success to the strategy of opening new markets. Because of the bad conjuncture in some of its traditional trade partners, such as the neighboring Latin American countries or the EU-countries, Brazil was engaged in finding increasingly more alternative markets in Asia, Eastern Europe and the Middle East. That way, exceptional growth rates could be achieved in 2002, especially with exports to Russia and China, who this way ascended to the group of Brazil's main trade partners. With an export growth of more than 200%, in the first semester 2003 China even became the second market after the USA. Trade with the "new markets" should continue being the driving force of the Brazilian export in 2004.

The import situation is completely different. The devaluation of the currency, as well as the weak domestic conjuncture led to a sharp decrease in imports. Compared to the previous year, the Brazilian imports went down to US$ 47.2 billion in 2002, falling by 15%. Furthermore, we notice the tendency that, due to a better quality competitiveness of the Brazilian industry, more and more higher-end import products are being replaced by local ones.

With the revaluation of the real it seems that the rock-bottom phase has been overcome. For 2003, we count on a slight increase of imports to US$ 49.3 billion. With the expected scenario revival, the import activities should increase significantly in 2004 and return to the 2001 levels of US$ 54.8 billion.

Foreign Exchange Reserves

The US$ 30 billion loan package granted by the International Monetary Fund (IMF) during the trust crisis in August 2002 proved the confidence that international financial experts have in Brazil and in its economic policy. Contrary to what happen in Argentina, for example, in the case of Brazil the IMF was immediately ready to offer the country its support. So far, the Brazilian government has complied with or even surpassed almost all the conditions imposed by the IMF without any problems, which the IMF has acknowledged several times. Right now, the Brazilian government and the IMF are verifying if the agreement, which expires at the end of 2003, should be extended once again. The existing foreign exchange reserves suffice to honor the external debt within the stipulated period in 2003.

Domestic Debt

Aside from external debts, the domestic debt traditionally represents a weakness in the Brazilian economic policy. At the end of 2002, the public debt was R$ 881.1 billion, which according to the exchange rate at that time represented US$ 185 billion and 56.5% of the gross domestic product. The Lula administration seems to be determined to take serious and lasting measures to fight the state debt problem. It submitted several draft bills to the Congress, which should allow for a midterm budget consolidation. The suggestions also include an extensive tax and pension reforms. The latter was already approved by the Parliament and now has only to be approved by the Senate. Furthermore, from 2003 to 2005, the government aims at a yearly primary surplus (surplus of the consolidated budget before deduction of interest payments) of at least 4.25% of the GDP. Thanks to the federal government's strict expenditure control there are strong indications that in 2003 the aimed primary surplus will probably be surpassed.

Interest Rates

In order to counteract the danger of the inflation dynamics that arose in the fourth quarter of2002, the Brazilian Central Bank increased the benchmark interest rate Selic in November 2002 to 22%.

In early 2003, the looming inflation development did not leave the new Central Bank Head another choice but to carry on the previous administration's orthodox monetary policy. The already elevated benchmark interest rates were increased to 25.5% in January 2003, and to 26.5% in March.

In the middle of 2003 with declining interest rates, the desired new trend began. In order to give the Brazilian situation a boost, the Central Bank - with the government's support - decided to lower the Selic-rate four times — from 26.5% to 20% per year.

If the price development continues subsiding, in the next couple of months the Central Bank should have enough leeway to significantly lower the benchmark interest rate in the mid-term.

External Debt

To reduce the high external debt is another challenge that the Lula administration will have to face during its mandate. After the debt rate was reduced from 1998 to 2001, it increased again slightly in 2002 to US$ 210.7 billion (2001: US$ 209.9 billion) compared to the previous year. Foreign liabilities were slightly more than 46% of the GDP, due to the strong devaluation of the real. Because of the restricted access to foreign credits there was limited increase, which can be explained mostly by additional credits from international organizations. However, the level of the private sector's indebtness decreased.

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