Lula gives state heavier hand in Brazil economy

By Raymond Colitt - Analysis

BRASILIA (Reuters) - Emboldened by emergency measures that helped pull Brazil out of a brief recession, President Luiz Inacio Lula da Silva is intervening more aggressively in the economy and betting on big government.

While many governments in the world are plotting exit strategies from the crisis measures adopted over the last year, the center-leftist Lula is seizing the opportunity to push for a stronger state role in the economy.

The increased intervention has raised concerns about public finances and is generating uncertainty for investors as the remainder of Lula's term through December 2010 could be less predictable than his previous seven years in office.

Last month, the Lula administration taxed foreign capital inflows to help stabilize the local currency, floated a proposal for a state company to expand broadband coverage in competition with the private sector, and threatened to charge a levy on iron ore exports to pressure mining giant Vale (VALE.N) (VALE5.SA) into building steel mills in Brazil.

Lula is pushing a bill in Congress that would increase government control over the oil sector, capitalize state energy company Petrobras (PETR4.SA)(PBR.N) and grant it a minimum stake in any joint venture in newly discovered oil fields.

He has also shored up state development bank BNDES with 100 billion reais ($56.6 billion) from the national Treasury and instructed other government banks to compete more aggressively with their private counterparts for market leadership.

"These signs are not good. I am very worried and so is everybody in industry," said Pedro Passos, president of IEDI, an industry-funded economic think tank in Sao Paulo.

"When the government starts talking about powerful state companies and grand development schemes, we are very cautious because it has failed before," he added.

Nobody expects Lula, a former labor union leader who has governed mostly as a centrist, to abandon the pillars of Brazil's economic stability or embrace more radical left-wing economic policies like those adopted in other South American countries, including Venezuela, Ecuador and Bolivia.

"The government definitely has become more affirmative but it's a cautious, calculated type of intervention," said Jose Luciano Dias, a political consultant in Brasilia.

SQUEEZED BUDGET

But a slew of tax breaks for key industries, massive loans to state enterprises and increased spending to finance a burgeoning state apparatus have compounded the impact of falling tax revenues.

The primary budget surplus, a measure of the government's ability to service its debt, had one of its worst showings ever in September, slumping to 1.7 percent of gross domestic product for the year from 5.1 percent in the same period in 2008.

Brazil navigated the global financial crisis better than most by aggressively cutting interest rates, slashing bank reserve requirements to free up money for lending, giving tax breaks to the automobile and home appliance industries, and strong-arming state banks into increasing lending.

Its success gave it an even stronger voice in forums like the Group of 20 developed and emerging economies, and Lula has appeared to grow bolder.