SAO PAULO, Brazil (AP) – Interest rates are still stiflingly high, anyone starting a business must do battle with mind-numbing bureaucracy and labor laws make it more expensive to fire incompetent workers than keep them on the payroll.

But the bottlenecks in Brazil’s economy are a far cry from the meltdown many envisioned when President Luiz Inacio Lula da Silva took office in 2003 as nation’s first elected leftist leader.

Silva is now seeking a second term in Brazil’s Oct. 1 election, vowing to stick to the market-friendly economic policies he embraced in his first term and that turned the ex-radical union leader into an ally of investors from Avenida Paulista in the heart of Sao Paulo’s financial district all the way north to Wall Street.

The incumbent’s nearest challenger – former Sao Paulo state Gov. Geraldo Alckmin – is seen as even more business friendly, making the presidential election, once an event fraught with uncertainty, a virtual cakewalk for investors.

Stocks show no sign of giving back astonishing gains of the last four years. Inflation is at almost unthinkable annual rate of under 4 percent. And foreign investment is rising amid signs of steady economic growth ahead no matter who wins the contest.

Polls show Silva winning the race with more than 50 percent of the vote. Alckmin is getting no traction from his attacks against Silva for Brazilian growth being below the Latin American average, his administration’s sparse spending on crumbling infrastructure and few advances on education in a nation of 185 million where many never get high school degrees.

Nor are his rivals on the left who have branded Silva, known universally as Lula, a sellout for embracing conservative economic polices.

“The quintessential leftist has turned out to be a model of fiscal discipline,” said Michael Shifter, a Latin America analyst at the Inter-American Dialogue think tank in Washington. “In a second Lula term we are likely to see continued moderation and pragmatism in economic policies.”

In his first term, Silva impressed even his critics by paying off billions of dollars in debt and increased spending on social programs without raising taxes.

With the president and his Workers Party cruising for another four years in power, investors expect interest rates will fall – albeit slowly. Tax and labor reforms currently stalled in Congress will be debated again, but it’s anyone’s guess whether they’ll get passed and bring down Brazil’s high cost of doing business. As for red tape, no one is expecting any new proposals to do away with it.

Still business confidence remains high, reflected by an announcement this month from IBM Corp. that it was more than doubling its Brazilian work force to 20,000 within the next several years to meet increased demand for computer services.

Brazil’s macroeconomic situation is driving the expansion, and the expectation is that there will be no significant shifts on the political-economic front to alter the outlook, said Rogerio Oliveira, IBM’s general manager in Brazil.

“We are at a level we have not been at for many years,” he said.

All that has generated a stunning array of Brazilian business statistics:

– Overall foreign investment reached $21.5 billion last year, the highest level since a flood of foreign money entered during a big privatization wave from 1998-2000.

– Brazil’s benchmark Bovespa stock index is up 220 percent since Silva took office, shooting past 40,000 points earlier this year before profit-taking sent it down to about 35,900. Banks have been among the biggest gainers, recording record profits.

– The nation’s currency, the real, strengthened 39 percent against the U.S. dollar during the same period.

– Inflation stands at 3.8 percent, down from a high of 13 percent earlier in Silva’s first term.

The biggest beef from Brazilian business and foreigners with operations here is the benchmark Selic interest rate, which stands at 14.25 percent but often translates into real rates of 50 percent or more for small business or consumers.

But the rate is down from a high of 19.75 percent put in place to rein in inflation, and experts predict it will drop to about 13.75 percent by the end of the year before falling further next year.

Brazil, however, still remains extremely vulnerable to external economic forces because a big part of its economy is dependent on volatile commodity prices for products like coffee, soy and sugar.

Also, the nation is sending ever-increasing quantities of iron ore and steel to feed China’s rapidly expanding economy. Any slowdown in Asia would have severe domestic repercussions.

Then there’s the history of sudden political crises that hit with little advance warning.

“That is part of the nature of Latin America,” said IBM’s Oliveira.

While exports have repeatedly hit record levels, some sectors that were rolling in profits only three years ago have seen their fortunes reversed because of the strong real – most notably Brazil’s auto industry, and its formerly robust apparel and shoe export business.

In the shoemaking city of Franca, 250 miles north of Sao Paulo, producers slashed the work force from 24,000 two years ago to about 14,000 now.

Export revenue from shoes has plunged from $175 million to a projected $110 million during the same period, and producers say the government has done little to help.

Overseas clients have turned to cheaper shoes from Argentina, Mexico, China and even Europe, said Jorge Donadelli, who heads the local shoe producer’s association.

“If the situation doesn’t change it will just get worse, but none of the politicians listen to us,” he said. “We have monetary policy of the first world for a developing nation.”

But analysts said there probably isn’t relief in sight for those hurt by Brazil’s strong currency. The last thing anyone is expecting from Silva is an administration that reverses course and intervenes with protectionist measures during industry sector slowdowns.

“I expect more of the same,” said Riordan Roett, director of Western Hemisphere studies at Johns Hopkins University. “Some shifts in the economic team, but a strong commitment to stable growth. That is an important part of his legacy.”

AP-ES-09-19-06 1807EDT


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