Integration Process

The Heads of Governments and States of Mercosul countries had their regular six-monthly Summit Meeting on 15^th June ’99 at Asuncion, the capital of Paraguay, the outgoing President of Mercosul. During this meeting they decided to form a technical committee for harmonisation of macro-economic policies of the member countries. The leaders agreed on the need to encourage expansion of medium and small enterprises in Mercosul and reaffirmed the need for deepening of relations with Chile and Bolivia, the Associate Members. They expressed their interest in strengthening relations with European Union. The subject of creating a single currency for Mercosul was also included in the agenda, although there was no hurry displayed by any of the countries in achieving this goal. The only notable thing was that Brazil, which was against the idea of a single currency earlier has now agreed to this proposal, in principle, for consideration.

The worry, uppermost in the minds of the Mercosul leaders during the Asuncion Summit was the crisis situation in their countries and Mercosul as a whole. The leaders agreed to hold more consultations to help each other to get over the economic difficulties. The first semester of 1999 was the most challenging period for Mercosul and it has arrested the momentum of the integration process. It is creditable that Mercosul is emerging out of this crisis period without any serious damage to itself as predicted by some critics.

The next President of Mercosul for the period July - December, 1999 would be Uruguay. One of the priorities for the new Presidency is to try for a common agricultural policy for Mercosul. It has been felt that such a common policy would be useful to rationalise the production and trade of agricultural commodities among member countries and also for negotiations with outside world, such as the European Union. There would be meeting of technical experts to discuss harmonisation of phyto-sanitary regulations, environmental protection, use of pesticides, standardisation of regulations regarding genetically altered products, financing of the agricultural sector etc.

Before the Asuncion Summit, the Presidents of Brazil and Argentina met in Buenos Aires on 6^th June ’99. In this meeting, both the leaders emphasised the importance they attach to Mercosul. The President of Brazil expressed his solidarity and confidence in the capacity of the Argentinian economy to recover from the current crisis situation. The two Presidents talked about adoption of a "Maastricht Process" in Mercosul. They agreed to coordinate the macro-economic policies of Brazil and Argentina as part of the process towards achieving such coordination for the whole of Mercosul. The macro-economic policies would include interest rates, public deficit, rate of inflation etc.

The President of the Brazilian Central Bank, while participating in a seminar in Rio on 25^th June stated that Brazil looked at the proposal for creation of a single currency for Mercosul favourably. In his view, it would be good for Mercosul in the long term. During his discourse, the President of the Central Bank clarified that Brazil would not be interested in adopting US dollar as a currency. He made this statement in the context of President Menem’s proposal for dollarisation of Argentinian economy.

The Mercosul Forum, which is a body consisting of businessmen of Member-states of Mercosul, had held some meetings during this period and prepared documents giving proposals on integration of Mercosul and coordination of macro-economic policies. These documents were delivered to the leaders of Mercosul during their Summit meeting in Asuncion in the middle of June ’99.

The crisis situation in Argentina caused by the general economic downturn after the Brazilian devaluation caused tensions in the commercial relations between Argentina and Brazil. One third of Argentina’s exports go to Brazil. However, after the Brazilian devaluation, the Argentinian goods lost their competitivity and on the contrary Brazilian goods became cheaper for imports into Argentina. This caused severe strains on Argentinian industry and economy as a whole. The Argentinians had a bitter taste of "Brazil-dependency" which was the concern of some opponents of Mercosul. However, the businessmen of the two countries in some major sectors of trading, met together to allay the fears of Argentinian industry about flooding of Brazilian goods into Argentina. They had worked out a number of understandings for voluntary restrictions in trade. On the other hand, the Government of Brazil also had given assurances to the Argentinian Government and businessmen that the Brazilian side would not take undue advantage of the situation in Argentina. In the event, the much feared flooding of Brazilian goods did not happen. While the Argentinian exports to Brazil had predictably gone down in this period, the Brazilian exports to Argentina also went down.

The Confederation of Brazilian Industry, in a statement released in the first week of May, affirmed that the "solution for the problems of Mercosul was more integration of Mercosul".

The Foreign Minister of Argentina, De Tella, in a statement to the Press on 12^th May expressed the view that Mercosul should focus more on deepening of the integration rather than expansion.

The integration process will continue to be slow in the next semester, since in this period the partner countries would be preoccupied with the recovery of their economies and Argentina and Uruguay go to polls to elect their Presidents in October ’99.

In April ’99, Volkswagen worked out a pioneering labour agreement with its workers in Brazil and Argentina. This is a forerunner of a collective Pan-Mercosul agreement which will mean a single labour contract for all of the 32,000 employees of Volkswagen in all the four countries of Mercosul. The labour unions also see advantage in collective bargaining for the employees of companies in Mercosul as a whole.

Trade

In the first five months of 1999, the intra-Mercosul trade fell by about 25 per cent, due to the crisis in Brazil and Argentina and the consequent impact on the other partners.

The Milk Producers’ Associations of Mercosul countries have agreed to pressure their governments to increase the Common External Tariff on import of powdered milk and cheese to 30% from the current tariff of 16%. The responses of the Governments are not known yet.

Brazil

In the first six months of 1999, total Brazilian exports were US dollars 22.4 billion, as against 25.9 billion dollars in the corresponding period of 1998, showing a decrease of 13.5%. On the other hand, the imports in the first semester of 1999 have gone down by 17% to 23 billion dollars from 27.8 billion dollars in the first half of 1998. The deficit for the first semester is 623 million dollars as against a deficit of 1.8 billion dollars in 1998 in the same period.

Brazilian trade with Mercosul in the first five months of 1999 declined by 29 %. While the exports were down by 28.6 %, the imports fell by 30.4 per cent.

Under an agreement signed between Brazil and USA, the steel exports of Brazil would be limited to 295,000 tons per year in the next five years. In 1998, Brazilian exports to USA were 403,000 tons. Fixation of this limit means that Brazil would not be subject to any more anti-dumping action by the United States.

The trade between Brazil and Argentina is expected to fall by 20% in 1999. The bilateral trade in 1998 was 14.78 billion dollars.

In the second week of May, the Government brought down to 350 from 700 the number of items of imports which need license. Many of the items in the list of 350 requiring advance license are in the area of textiles and chemicals. It is to be noted that USA, EU and Switzerland had complained (May ’99) to WTO that the Brazilian licensing system of imports was not transparent and was not compatible with WTO norms. They had also complained about the undue delay in issue of import licenses after submission of applications and lack of transparency in decision making.

Brazilian importers of raw materials for textile industries have complained to the Government that the minimum prices fixed on a number of items are much higher than international market prices. The Brazilian Association of Textile Industries (ABIT) has officially taken up the matter with the Government. The Belgian Textiles Federation has also complained to the European Commission about the high and arbitrary minimum prices and has asked the Commission to take up the matter with the Brazilian Government.

The Government announced on 1 April ’99 reduction of import duties by 4 % (on and average) on imports of 89 products. Of this, 49 products are electro-electronic products such as washing machines, vacuum cleaners, refrigerators, freezers, ovens, voice mail equipments, cassette players etc. The other 40 products are medicines and health care products. These 89 products were earlier in the list of exceptions to the products covered under the Common External Tariff of Mercosul.

Embraer, the aircraft manufacturer of Brazil, has got orders worth 4 billion dollars for exports in the next three years. This has made Embraer as one of the largest foreign exchange earners for Brazil.

Consequent to the 19 per cent increase in domestic production, imports of raw cotton will decrease this year. The annual consumption is 700,000 tons. The production in 1998-99 is 490,000 tons as against the production of 411,000 tons in 1997-98.

Coffee exports in 1998-99 were 21 million bags (60 kilo each) making this year as the best in the last eight years. Export revenue was 2.42 billion dollars. The large exports in 1998-99 was due to the highest production of coffee, of 35 million bags, the best in the last eleven years. In 1999-2000, the production and exports are expected to fall to 26.5 million bags and 19 million bags respectively.

Brazilian exports to Asia and Russia which had gone down in 1997-98 after the crisis in these regions has now started increasing with the recovery of these markets.

Argentina

Exports in 1999 are projected to go down to 24.08 billion dollars from 26.22 billion dollars in 1998. On the other hand, the imports are also estimated to fall to 26.64 billion dollars in 1999 from 29.44 billion dollars in 1998.

Exports of grains are expected to fall by about one-third in volume because of the fall in production.

According to the National Commission on Foreign Trade, 55% of Argentinian exports to USA and 73% to Canada face non-tariff barriers.

The National Commission on Foreign Trade decided in May this year to take some measures for restriction of imports of fabrics, both natural and artificial from Brazil, Pakistan and China. The Commission proposes to impose quotas on imports from these three countries for the next three years.

The Argentinian authorities have introduced some more bureaucratic procedures adding to the paper work of the importers from 1^st of June. From this date, the importers are required to make a detailed declaration of the imports. The importers have protested against this bureaucratic measure since this is going to add to the time for clearance of import of goods.

The Argentinian Government has announced increase in the subsidies for exports from May ’99. This is being done to help the exporters whose products have become less competitive after the Brazilian devaluation and the over-valued Argentinian currency Peso. Subsidies for exports of cereals have gone up from 4.1% to 10%. Subsidies for meat exports have increased from 5.4% to 10%. Subsidies for milk products have gone up from 5.4% to 9% and on some agricultural products the subsidies been increased to 10% from 6.3%.

Uruguay

Total exports in 1999 are expected to fall to 2.5 billion dollars from 2.76 billion dollars in 1998. Imports are also expected to go down to 3.48 billion dollars from 3.8 billion dollars in 1998.

Chile

Exports in the first quarter of 1999 fell by 2.5 % to 3.9 billion dollars in comparison to the first quarter of 1998. Imports declined sharply by 28.4% to 3.3 billion dollars in the period January – March ’99 in comparison to the corresponding period in 1998.

Chilean export revenue has fallen because of the reduction in the demand from Asia and the general fall in the prices of the principal items of exports namely copper, paper and cellulose, fruits, wines and fish and seafood.

Wine exports were 93.6 million dollars in the first quarter of 1999 down from 104.3 million dollars in the first quarter of 1998.

Chile and Bolivia (who are Associate Members of Mercosul) have agreed in the first week of April to reduce customs duty on 90 per cent of the products of bilateral trade. Exports of Chile to Bolivia in 1998 were 212 million US dollars while the imports were 37 million dollars.

Bolivia

Exports in 1999 are expected to increase marginally to 1.196 billion US dollars in 1999 from 1.103 billion dollars in 1998. On the other hand, imports are likely to decline to 1.917 billion dollars from 1.983 billion dollars in 1998.

Markets

Brazil

Economic Recovery

The Brazilian Economy has already started the recovery from the severe crisis of the first quarter of 1999, caused by the devaluation of the currency on 13^th January, 1999. The recovery has come much earlier than what the analysts, economists and bankers predicted. The recovery has also come much stronger than expected. Even the Government of Brazil was somewhat taken by surprise (pleasantly though!) by the speed and strength of the recovery.

Exchange Rate

The most significant point of recovery is the stabilisation of the exchange rate. The Brazilian Real which reached a peak level of R$ 2.20 for US$ 1.00 during the period of panic has now come down to R$ 1.70 for one US dollar since April. The pre-devaluation exchange rate was R$ 1.20 for a dollar. There are very strong grounds to believe that the exchange rate would stabilise around R$ 1.7 for a dollar during the rest of the year. The stabilisation of exchange rate is creditable, particularly in view of the fact that this has happened under the system of floatation. When the Brazilian Government took the courageous step of floating the currency in January ’99, it was considered as risky given the volaltility of the international financial market at that time.

Growth Rate

The GDP of Brazil has grown by 1.02 % in the first quarter of 1999. This has come as a surprise to everyone who had predicted that the GDP would fall by 4 to 5% this year. It may be noted here that the GDP fell by 1.68% in the last quarter of 1998 and 1.5% in the third quarter of 1998. In this background, the positive growth rate achieved in the first quarter of 1999 has come as a moral booster.

Inflation

During the crisis period, there were widespread fears that Brazil would be visited again by the curse of inflation which had reached more than 2000% in the past. One of the major priorities of the Brazilian Government in the last four years has been to control the inflation and remove the fear from the minds of the public. They have succeeded in this task remarkably in the last four years and brought inflation down to 2.8% in 1998. After the crisis, some observers had warned that the inflation might go up to 70% in 1999. This fear has been proved to be highly exaggerated. The inflation in the first quarter of 1999 has reached only 7%. This has added to the optimism of the public and the Government who are hopeful that the inflation could remain in single digit in 1999.

The Government has set the inflation target as 8% in 1999, 6% in 2000 and 4% in 2001. It may be noted here that inflation was 1.65% in 1998 and 5.2% in 1997.

Foreign Investment

The most decisive indication of the restoration of confidence in the Brazilian economy is the fact that the foreign direct investment in the first five months has reached an impressive figure of US dollars 10.72 billion as against 5.5 billion dollars of investment in the period January – May, 1998. The foreign investors have not been deterred by the crisis situation. It is expected that the foreign investment this year could reach around 20 billion dollars. Last year, the foreign direct investment was 24 billion dollars. One of the important factors for this large investment is the privatisation programme which is being implemented vigorously.

Apart from foreign direct investment, the inflow of short term capital has also resumed steadily into the Brazilian stock exchange and funds.

In April this year, the Brazilian Government has successfully issued global bonds worth over two billion dollars. This again is an indication of the restoration of confidence in Brazil by foreign investors.

Interest Rate

As part of the fire-fighting measures, the Government had increased basic interest rate to 45% in January, 1999. This had choked the local business. With the improvement in the situation, the Government has brought down the interest rate in several stages to 21% in June. The Government is committed to bring the interest rate further down in the coming months.

Reserves

The reserves has climbed up to 44 billion dollars in June from the lowest level of 33 billion dollars reached in January ’99 during the crisis.

Reasons for Rapid Recovery

One of the main reasons for the rapid recovery is the good performance of the agricultural sector. The harvest this year has been good and the grain production reached 83 million tons. The agro-sector has grown by 17.7% in the first quarter of 1999.

The second reason is the competent crisis management of the Brazilian Government. It took longer for the economies of Mexico, Thailand and Korea for recovery since these countries were taken by surprise by the crisis. That is why, they had suffered contraction of the economy by 6.9% in the case of Mexico, 8% in the case of Thailand and 5.5% in the case of Korea. But the Brazilian economy has recovered faster since the Government of Brazil had been anticipating the crisis and were well prepared to face and manage the crisis.

The third reason for the quick recovery is the strong conviction both inside Brazil and more strikingly outside Brazil that the Brazilian market is fundamentally sound. Companies who are seriously interested in the Brazilian market, are of the unshakeable opinion that the Brazil of today is totally different from the crisis-ridden Brazil of the past. The Brazilian politics, economic policies, social and cultural values have undergone a fundamental transformation. The Brazilian economy has come to stay as a large economy with immense potential for growth. In this scenario, the crisis was seen as a temporary set back which was caused essentially by the external shocks which came from Asia and Russia.

IMF

IMF is also pleasantly surprised by the rapid recovery of the Brazilian economy. They have commended the Brazilian authorities for their management. They have revised some of the targets set earlier as part of the conditionalities for aid.

Will the Crisis Repeat itself?

While it can be said clearly that the worst is over, one should not under-estimate the external environment which could still cause problems for Brazil. While the Asian countries have recovered, the Russian crisis still looms large and any serious deterioration of the Russian economy would have an impact on the Brazilian economy as it happened in September ’98. But the impact would be less next time and it would be manageable.

Industry

Mercedes Benz inaugurated a new factory for production of ‘A’ Class passenger cars in Brazil. This is the first factory of Mercedes for making passenger cars outside Germany. The factory is located at Juiz de Fora, in the State of Minas Gerais. The factory which received an investment of US dollars 820 million will have a capacity to produce 70,000 cars per year. 15 per cent of the production would be for exports to Mercosul.

Ford has announced its decision to set up a factory in the State of Bahia at a cost of US dollars 1.3 billion for production of 150,000 cars per year.

Brazil has reached the fourth place in the world production of ceramic tiles. The production in 1998 was 400 million sq. metres by 121 companies. Exports of ceramic tiles in 1998 were US $ 155 million.

The garment industry of Brazil produced 4.2 billion pieces in 1998. After the devaluation, imports have become costlier. This has given space for the local garment industries to get a greater share of the local market. The garment industries are investing in modernisation and expansion to increase their production capacity. The production is expected to increase by three percent in 1999.

Investment

Coca Cola is investing 400 million dollars in 1999 in Brazil. Part of the investment would go to the plant in Manaus for production of concentrates. Exports of Coca Cola concentrates from the Manaus factory in 1998 were 75 million dollars.

According to the Federal Government, Reais 34 billion would be invested in power generation, transmission and distribution in the power sector in the period 1999-2002. Of this, Reais 8.6 billion would be invested in 1999, Reais 9.4 billion in the year 2000, Reais 8.5 billion in the year 2001 and Reais 7.8 billion in the year 2002. The investment would come both from the public and private sector and through privatisation. These investments would increase the power generation by 40% from the present capacity of 62,200 megawatts.

The Ministry of Mines and Energy have announced projects for construction of eight thermal power stations which should be ready by the year 2001. These would produce 4000 m.w. of power. These would be constructed in São Paulo, Rio and the State of Bahia.

Investment in the infrastructure this year is expected to reach US$ 15 billion, according to information given by the Brazilian Association for Infrastructure Industries. 70 per cent of the resources are expected to come from outside Brazil.

According to a survey (June ’99) of the American consultancy firm AT Kearney, Brazil is the fourth most attractive country for investment by Multinational Corporations, after USA, China and United Kingdom.

There would be an investment of US dollars 1.3 billion in 1999-2000 in the construction and expansion of 28 shopping centres. It may be noted here that Brazil ranks seventh in the world in terms of the number of shopping centres. Investment in 1997-98 was 960 million US dollars.

Privatisation

The São Paulo gas utility company, Comgas was privatised in April ’99. It was bought over by a consortium of British Gas (95%) and Shell (5%) for Reais 1.65 billion. The new owners have announced plans for investment of 200 million dollars in the next two years.

Areas for exploration of petroleum were auctioned for the first time. Earlier, exploration was the monopoly of the State company Petrobras. The auction of the new blocks for exploration fetched 218 million Reais in June. One third of the new areas were bought by Petrobras itself, while the other two-thirds went to companies such as Agip, Texaco, Esso etc. These companies have announced plans for investment. In the next five years, investment in the petroleum sector is expected to be five billion dollars per year.

Minerals

According to the Ministry of Mines and Energy, the production of minerals in 1998 rose by 10.7 % in comparison to 1997. The production of iron ore in 1998 was 195 million tons, the production of petroleum was 56.5 million tons, aluminium was 11.7 million tons, manganese 2.2 million tons and gold 49,000 tons.

Agriculture

The production of food grains in the harvest season 1999-2000 would be of the order of 90 million tons, according to the Ministry of Agriculture. This would be an increase of 8 per cent in comparison to the production in 1998-99. This would mean, reduction in the imports of rice, in particular, and other food grains in general.

Other developments of interest

The Government has increased the minimum salary to 136 Reais from 1^st of May ’99. In 1998, the minimum salary was R$ 130 and it was R$ 120 in 1997 and R$ 112 in 1996.

Registration Charges

The National Agency for Sanitary Vigilance has announced on 21^st June ’99 the revised rates for registration of various products, mainly in the pharmaceutical, cosmetic and food areas. According to the revised rates, registration of new pharmaceutical molelcules would cost R$ 80,000, the registration of similar pharmaceuticals would cost R$ 21,000, while generic products would cost R$ 6000. All these registrations would be valid for five years. This may be noted by our pharmaceutical companies who are interested in registering their products in Brazil.

According to the Association of Super Markets, there are five super market chains, which had a turnover of more than one billion Reais in 1998 each. Carrefour topped the list with a turnover of 6.9 billion Reais, followed by Pao de Açucar, with 5.5 billion Reais, Bomprego 2.4 billion Reais, Sendas 1.9 billion Reais and Sonae 1.5 billion Reais.

Argentina

The Argentinian economy was thrown into a recession principally by the Brazilian devaluation. Since one third of the Argentinian exports go to Brazil, the exports were seriously affected by the devaluation and the reduction in the demand of Brazil. The reduction in global demand for Argentinian goods and the fall in international commodity prices have also been hurting Argentinian exports. Industries faced the brunt of this crisis and this in turn affected employment and the economy as a whole.

The Argentinian market faced a crisis situation in May this year. There were rumours of devaluation of the Argentian currency. George Soros, the financial speculator of USA in an interview to NBC on 21^st May’ 99 said that the Argentinian currency was over-valued and made some pessimistic predictions about Argentinian economy. This had aggravated the situation and the economy faced turbulent times in May. However, the Government reaffirmed its commitment to the parity in exchange rate between Peso and US dollar. Towards the end of the first semester the pressure on Argentina eased off.

In contrast to the 1995 recession, caused by the Mexican crash, the current downturn is not being aggravated by any financial meltdown. There was no run on deposits or outflow of foreign exchange as it happened in 1995. This time, the crisis has remained more manageable. The banking system which was reformed after the 1995 crisis has withstood the crisis in a better manner. Also, the Government has managed the situation better after its experience in 1995. Moreover, the adequate international reserves, ample liquidity in the banking system and the emerging line of credit with IMF also helped. The speculation and rumours subsided quickly and hopes for early economic recovery increased after the strong and early recovery of the Brazilian economy itself.

Industrial production has generally gone down in the first semester of 1999. Exports have dropped. Unemployment has increased to 15% in May ’99 from 12.4% in October ’98. Between May ’98 and May ’99 about 80,000 employees have lost jobs.

According to current projections, the economy is expected to contract by 2.4% in 1999 as against the growth of 4.2% in 1998. In 1995, after the Mexican crash, the economy contracted by 4.6 per cent.

President Memen of Argentina continued to harp on dollarisation of the Argentinian economy. However, none of the three candidates for the Presidency favoured dollarisation. All of them have expressed their commitment to the dollar – Peso parity in exchange rate.

The crisis in May ’99 and the speculation about a possible devaluation of Peso gave rise to some debate about the validity of the ‘currency board’ system of Argentina under which Peso is linked to US dollar at a fixed parity of 1 : 1. It has also been realised by the business that this system has made Argentinian exports less competitive in the international market. But the Government and the Presidential candidates reiterated their commitment to the present system which has generally brought about economic and financial stability in Argentina in recent years. There is, therefore, no possibility of change from the present system at least in the next one year until a new President settles down after taking over from President Menem in December ’99.

Industrial production contracted by 11% in the first quarter of ’99, lead by consumer durables.

Production of automobiles went down by 50 % in the first four months of 1999 in comparison to the corresponding period of 1998.

Despite the impact of the Brazilian crisis, the Argentinian Government managed to issue Euro and dollar-denominated debt in the international market for a total of 4 billion dollars. The conditions for the issue were, of course, more unfavourable and the price was higher this time.

Agricultural production has gone down to 58.7 million tons in the harvest season 1998-99 from 67 million tons in 1997-98. Wheat production has gone down to 10.7 million tons from 15 million tons; corn production down from 19.36 million tons to 14.5 million tons; soya bean production down from 18.7 million tons to 18.5 million tons. Adverse weather conditions and fall in international prices are the main reasons for the fall in production.

The production of cotton in Argentina is expected to fall to 250,000 tons, a 28 per cent decrease from last year’s harvest.

IMF held negotiations with the Argentinian Government in April ’99 revising the targets set under the earlier agreement. Argentina’s explanations for inability to achieve some targets because of the Brazilian crisis were accepted by IMF.

The recession will cause gross fixed investment to fall by 7% this year, compared with a 9% increase last year. But foreign direct investment is expected to continue the flow in view of the privatisation programmes.

Excess liquidity in the banking system is forcing interest rates down to record lows. The prime rate for 30-day dollar loans was at 7 per cent in end-April.

Inflation is expected to go down to 0.1 per cent in 1999 as against 0.7 per cent in 1998, 0.3 per cent in 1997 and zero per cent in 1996.

The reduction in imports will reduce the trade deficit. But this will be offset by higher debt service costs. The current account deficit is expected to reach 12 billion dollars in comparison to 12.1 billion dollars in 1998.

Uruguay

The economy of Uruguay was also affected by the crisis in Brazil and the subsequent crisis in Argentina. The economy which registered a growth of 4.5 per cent in 1998 is expected to contract by 2.4 per cent in 1999. Inflation is expected to be around 5 per cent in 1999 as against 8.6 per cent in 1998. The exchange rate in December ’99 is expected to be US$ 1.00 = 11.29 Ps as against the December ’98 rate of US$ 1 = 10.82 Ps.

Paraguay

The President of Paraguay announced on 22 June ’99 that the Central Bank would stop intervening in the market and let the market decide the exchange rate of Guarani, the local currency. The rate on 22 June stood at US$ 1.00 = 3550 Guaranis. Since January '99, the Guarani has depreciated by 8 per cent vis-a-vis the US dollar.

The basic interest rate has been brought down to 16.5% from 30% last year.

Chile

The Chilean economy which had registered consistent growth since 1983 has entered into recession in 1999. According to the Chilean Government, the Chilean economy contracted by 3.2% in the first four months of 1999. Industrial production has gone down and unemployment has increased to 8.5 percent. Exports to Asia which account for 33% of the total exports of Chile have gone down drastically after the Asian crisis.

The Government has taken a number of measures to deal with the recessionary situation. Interest rate has been brought down to about 5% in June ’99 from 14 % in September ‘98. Public expenditure is being reduced.

On the positive side, it is to be noted that Chile has adequate level of foreign exchange reserves (14.9 billion dollars in March ’99) and continues to attract large foreign investment inflows.

Despite the difficult times for the economy, the direct foreign investment in Chile in the first four months of 1999 reached 2.4 billion US dollars. Forty nine per cent of the investment went into the energy sector.

Chilean direct investment abroad reached 1.2 billion US dollars in the first quarter of 1999.

The Chilean currency Peso had weakened in the first quarter of 1999 following the devaluation of Brazilian currency. But it strengthened later as a result of large capital inflows. The exchange rate by the year-end is expected to be around US$ 1.00 = 510 Pesos in comparison to US$ 1.00=473.8 Pesos in end-1998.

On 19^th April, the Central Bank announced a number of measures liberalising the foreign exchange controls. Some of the important measures (effective from 1^st June ’99) are the following :

- Banks are allowed to contract financial credits abroad or

widen their foreign credit lines without previous authorisation.

- The obligation to exchange the proceeds of foreign borrowings

in the foreign exchange market was eliminated.

- Restrictions were lifted on foreign investors exchanging their

capital inflows into local currency or purchasing foreign

currency for repatriation purposes.

The process for privatisation of the ports, which had been taken to court earlier by public interest groups, was opened on 1^st April ’99.

Chile’s copper output has reached 3.69 million tons in 1998 from 1.59 million tons in 1990. The present share of Chile in the world copper production is 27% and it will reach 30% in 1999, when the output would reach 4.17 million tons.

The low rainfall in 1998 and the continuation of the drought in 1999 have caused drop in the hydroelectric power generation. Power shortages are being experienced since late March and electricity is being rationed.

Automobile sales fell by 36% in the first quarter of 1999.

Bolivia

The growth in 1999 is expected to be 3.8 percent in comparison to the growth of 4.2 percent in 1997 and 4.8 percent in ’98. Inflation is expected to increase from 4.4 percent in 1998 to 6.5 percent in 1999. The exchange rate at the end of 1999 is likely to reach US$ 1.00 = 5.94 Bs from the level of US$ 1.00 = 5.65 Bs in the end of 1998 and 5.37 Bs in end-1997.

After a difficult year in 1998, in which overall agricultural output shrank by 3.5% owing to the adverse effects of falling commodity prices and crop damage caused by El Nino, the sector has been hit once again by the adverse weather conditions of the first quarter of 1999. Drought in the beginning was followed by excessive rainfall causing damage to the production of soya beans, rice and maize crops.

Mining industry was also affected in 1998 by the depression in world prices.

Foreign direct investment has been steadily increasing from 424 million dollars in 1996 to 635 million dollars in 1997 and 693 million dollars in 1998.

External Relations of Mercosul

European Union

A Summit Meeting of the Heads of States and Governments of EU and Latin America and Caribbean was held in Rio on 28 and 29 June ’99. This is the first such Summit Meeting between the two regions. It is also the largest hemispheric meeting in the American continent. 33 countries from the American continent (except Uncle Sam) and 15 from EU were represented. The Summit issued a ‘Rio Declaration’ according to which the two regions will promote strengthening of political, economic and commercial relations. The Rio declaration calls for ‘strategic partnership’ based on ‘political dialogue’ and ‘balanced liberalisation of trade and capital flows’. Working groups at different levels would be set up to review and implement the Rio decisions.

The next Summit Meeting of EU-Latin America is to be held in Madrid in 2002.

During the Summit Meeting, the Heads of States of EU and Mercosul had a separate meeting and reached a landmark agreement between the two blocs to start negotiations to form a free trade area. If this materialises, it would become the largest free trade area in the world. The negotiations would start by July 2001. It may be noted here that EU and Mercosul have regular cooperation programmes under a framework agreement signed a few years back. Mercosul’s role model for integration is ‘EU’. On its part the European Union has always encouraged Mercosul integration. This collaboration suits both the sides to counteract the domination of South America by USA.

The trade between the Mercosul and EU has increased from 25.7 billion dollars in 1992 to 40.9 billion dollars in 1998. European Union is the largest investor in Mercosul.

Earlier before the Summit, the European Union had internal divergencies among member States about giving authority to the Commission of EU for negotiations for a Free Trade Area with Mercosul. The opposition was mainly from France on the basis of their fear about competition of Mercosul agro-products in the EU market. France wanted to postpone the EU-Mercosul Free Trade Area negotiations to 2003. But Portugal, Spain and Italy pushed for early negotiations. In the event, July 2001 was chosen as the compromise date.

To allay the fears of the United States which does not take kindly to the European incursion into their backyard, the Brazilian President stated that the EU-Latin America co-operation would not come in the way of the on-going negotiations for formation of a Free Trade Area of the Americas. USA had sent a special envoy to South America in the first week of June to give a message that "USA and Mercosul need to work together".

According to a study by the Getulio Vargas Foundation of Brazil, Free Trade Agreement with EU would bring more benefits to Brazil and Mercosul than the gains from FTAA.

United States of America

President Cardoso of Brazil visited USA in the second week of May ’99. The visit was described as a visit for promotion of "economic and commercial" interests of Brazil. President Cardoso thanked President Clinton for the support received from the American Government during the Brazilian crisis. President Cardoso addressed a number of meetings of American businessmen. In these meetings, he emphasised the recovery of the Brazilian economy and the long term advantages of the large and growing market of Brazil for American businessmen.

The Under Secretary for Latin America in the State Department, Mr. Romero, in a statement made on 3 May ’99 said that dollarisation of Latin America was inevitable. This is the first such firm statement from an American authority. Earlier, Alan Greenspan, the Chief of Federal Reserve and Rubin, the Treasury Secretary, were cautious and ambiguous in their statements on the subject.

Four cities of USA (Miami, Newark, Chicago and Bridge Port) have filed cases against the largest Brazilian manufacturer of guns, ‘Taurus’ seeking compensation for the expenditure incurred to deal with crimes caused by the sales of weapons. This is part of a series of litigations against gun manufacturers. It may be noted that Brazil is the second largest exporter of guns to USA. In 1998, Brazil sold 133,000 revolvers to USA. Brazil is the fourth largest producer of guns although it consumes only 10 percent of the production. 90 per cent of the production is exported.

Canada

Canada is keen to sign a Free Trade Agreement with Mercosul as early as possible. Since the process for creation of Free Trade Area of the Americas (FTAA) is being very slow mainly because of the obstacles posed by the American Congress, the Canadians seem to be interested in a bilateral agreement with Mercosul. The Canadian companies are interested in investing in Mercosul in the areas of mines, industrial equipment, tele-communications and electrical energy.

Mexico

The Mexican President visited Brazil on 27-28 April, 1999. The main focus of the bilateral talks was strengthening of economic and commercial relations between the two countries. Mexico’s exports to Brazil in 1998 were 974 million dollars and their imports from Brazil were one billion dollars. The bilateral Trade Preferential Agreement between the two countries expired in December ’97. Since then there have been attempts to renew the agreement without success. According to the Brazilian businessmen, Brazilian exports have increased and trade deficit with Mexico has decreased after the expiry of the Preferential Trade Agreement. The Foreign Trade Ministers of the two countries are to meet in July for negotiations on a trade agreement. The other Mercosul partners are not happy with the unilateral Brazilian trade agreement with Mexico.

Spain

Spain has emerged as the second largest investor in Brazil overtaking Germany. Total Spanish investment in Brazil is US$ 10.9 billion, while the German investment is 10.5 billion dollars. USA is, of course, number one investor with 38.5 billion dollars. Japan’s investment is 8.7 billion dollars, French investment is 8.6 billion dollars, Italy’s investment is 6.1 billion, Dutch 5.7 billion dollars, Portuguese 5.5 billion dollars, Swiss investment is 4.2 billion dollars, Canadian investment is 3.9 billion dollars and Chilean investment is 1.4 billion dollars. The total foreign investment in Brazil as on 31^st December, 1998 is 130.7 billion dollars.

Spain is the number one foreign investor in Argentina in the period 1994-99. Spain’s investment is 21.69 billion dollars. United States is second with 20.07 billion dollars. These are followed by France with 6.38 billion dollars, Chile 5.54 billion dollars, Italy 3.92 billion dollars, UK 3.27 billion dollars, Canada 1.56 billion dollars and Germany 1.49 billion dollars.

Italy

The Italian investment in Argentina in the period 1997-2000 is around a billion dollars. Much of this is in the field of communications.

Germany

President Cardoso of Brazil visited Germany in the third week of April. During the visit, the President briefed businessmen about the recovery of the Brazilian economy. It is interesting to note that São Paulo is the seat of more German companies than any other city within Germany itself.

Venezuela

The President of Venezuela, during his visit to Brazil in the first week of May this year, proposed the creation of Petro-America (to be formed by petroleum companies of Brazil, Columbia, Venezuela and Mexico). The proposed firm would be involved in exploration and production of petroleum and production of petro-chemicals in the whole of the American continent. There has been no public response to this proposal from the governments or the petroleum companies of the proposed partner countries.

Peru

The Peruvian Government has initiated projects for building roads, connecting the North-west of Brazil to the ports in Peru. Peru hopes to gain from the Mercosul integration and traffic in goods from the North-west of Brazil to their ports.

Andean Pact

Following the breakdown in trade talks between Mercosul and Andean Pact in April, Brazil decided to go it alone and started negotiations with the Andean Pact. In June ’99, a broad agreement has been reached. Under this Agreement, preferential tariffs have been agreed for about 3000 products for two years. The unilateral action of Brazil in going for an agreement with Andean Pact has not been liked by the other Mercosul partners.

South Africa

South Africa has imposed temporary anti-dumping duty on imports of paper imported from Brazil and Indonesia, pending investigations.

Latin America

According to World Bank projections, the economy of Latin America will have zero growth in 1999 in comparison to the 2.5% growth shown in 1998.

Indo-Mercosul Relations

A number of Indian companies faced payment problems from Brazilian clients in the period January to April ’99. This was mainly because of the uncertainty caused by the exchange rate fluctuations of the Brazilian currency Real. The Brazilian importers were waiting for the currency to stabilise for making payments. Now that the currency has stabilised around R$ 1.70 for one US dollar, the payments have started flowing.

Between January and April, import orders from India were less because of the uncertainty caused by the fluctuations of the exchange rate. After the stabilisation of the exchange rate in April, the importers have resumed placement of orders from Indian suppliers.

The Brazilian entrepreneur Mr. Abraham Kazinski has announced that his company would produce three-wheelers in collaboration with Bajaj of India.

The Jute Manufacturers Development Council has appointed a Brazilian law firm to fight the anti-dumping duty imposed on import of jute bags from India.

Twelve Indian companies participated in the International Textile Fair held in São Paulo from 22 to 25 June, 1999. The participation was coordinated by ITPO. The Indian companies which participated in the exhibition with products such as readymade garments, fabrics, yarn and made-ups received encouraging response from the Brazilian importers.

An Indian company participated in the Hospitalar Fair (International Fair for Hospital and Medical Equipments), held in São Paulo from 22 to 25 June, 1999.

A delegation of the Spices Board visited Rio and São Paulo from 13 to 17 June ’99. The delegation had meetings with the Ministry of Agriculture regarding clearance of spices, besides meetings with importers. The delegation was led by the Chairman of the Spices Board.

A delegation of the Automotive Components Manufactures Association (ACMA) visited Belo Horizonte, Rio and São Paulo from 5 to 13 May, 1999. The delegation consisted of eleven senior executives, such as Managing Directors, Executive Directors and Vice-Presidents of the companies. The delegation visited plants of the major auto manufacturers and had meetings with Industries and Trade Associations besides individual meetings with importers. The visit of the delegation has opened the eyes of both the Indian side and the Brazilian side about the scope for export of auto parts from India to Brazil. There is scope for supply of auto parts to the OEMs as well as to the after-sales market.

A number of individual exporters of pharmaceuticals, chemicals, engineering products, spices, incense sticks and garments visited São Paulo in this period.

Secretary (West) in the Ministry of External Affairs visited Brazil, Argentina, Columbia and Ecuador for consultations with the Governments.

The Commerce Minister was to visit Brazil, Argentina and Mexico in the third week of July and to chair a Conference of the Indian Commercial Representatives in Latin America. Unfortunately, it has been called off for the moment.

Future Events

A high level delegation of AEPC led by the Textile Minister is visiting São Paulo and Rio in Brazil on 26 – 27 July. Thereafter the delegation would visit Venezuela and Mexico.

Texprocil is planning to bring a delegation to Brazil and other Latin American countries in the first week of August.

In recent years, Brazil had emerged as the largest importer of rice in the world. There was scope for exports of rice from India. We had encouraged Indian exporters to seize the opportunity. But unfortunately, the response from India was poor. Only one company had exported rice worth 3 million dollars in 1998. But in 1999, the domestic production of rice has increased. The gap of about a million tons between the total production and consumption would be met entirely by imports from Argentina and Uruguay. There is, therefore, not much scope for exports of rice from India to Brazil in 1999-2000. Thereafter, there might be scope for exports, since rice production might go down as part of the ups and downs of the agricultural cycle.

A delegation of Indian software companies is visiting São Paulo from 18 to 25 July ’99. The visit is being organised by the Electronics and Computer Software Expórt Promotion Council. The delegation will visit the International Software Fair (FENASOFT) from 21 to 25 July and will hold discussions with Brazilian companies for export of software and for exploring possibility of collaboration and joint ventures.

The Spice Board, alongwith some spice exporters, will be participating in the International Food Ingredients Fair to be held in São Paulo in August.

ITPO has been requested to coordinate the participation of Indian companies in the International Fair for Alternative Therapies and Natural Products to be held in São Paulo from 14^th to 17^th October, 1999. The Department of Indian Medicines of the Ministry of Health has been requested to bring a delegation of speakers to participate in the International Congress on Alternative Therapies to be held at the time of the International Fair.

An Indian Fashion Show is planned to be held in São Paulo on 17^th November ’99 at the time of meeting of the International Institutes of Fashion Technologies. The fashion Show is being organised by NIFT in collaboration with the Ministry of Textiles and AEPC.