Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Iq Next 1 Page(s) In Document Denied Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Directorate of Intelligence 4 e t a F -a F. x: a~ ? ILL U2 Ulu'~t tL ! Fiji K ON and Democracy Brazil's Sarney Administration: Economic Stabilization (9WMJK PAGE NUMBERS oZ 0 TOTAL NUMBER OF COPIES DISSEM DATE l~ o ~D CP /QO - EXTRA cDPIES RECORD COMM 1 ~ ~- 3 9 JOB NUMBER 7'.? 3 7d ~-/ Secret ALA 86-10028 June 1986 320 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 25X1 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Directorate of Secret Intelligence Brazil's Sarney Administration: Economic Stabilization and Democracy This paper was prepared by 25X1 =, Office of African and Latin American 25X1 Analysis 25X1 Comments and queries are welcome and may be directed to the Chief, South American Division, ALA, Secret ALA 86-10028 June 1986 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 11 . d i~ II ! I I I I I III Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 ___ Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Secret and Democracy Brazil's Sarney Administration: Economic Stabilization Key Judgments Brazil's relatively smooth transition to civilian rule under the year-old information available administration of President Jose Sarney has served broad US interests in as of 28 April 1986 furthering the democratization process in Latin America and in maintain- was used in this report. ing the stability of the region's most populous and economically powerful state. Thrust unexpectedly into the presidency after the death in April 1985 of President-elect Tancredo Neves and lacking Neves's stature and national political base, President Sarney has, nevertheless, succeeded so far in holding together a disparate governing coalition, maintaining military backing, and pursuing economic policies that last year helped Brazil register the world's highest GNP growth rate. With his political base strengthened by the results of last November's municipal elections, an increasingly self-confident Sarney has recently abandoned his low-key style and begun to use more freely the considerable authority of the Brazilian presidency to gain control over an inflation rate that had soared to an annualized monthly rate of more than 400 percent. He made his boldest move in February by announcing an unprecedented economic program that includes currency reform, a temporary wage and price freeze, and gradual elimination of Brazil's pervasive indexation system. discouraging new private investment. To date, the emergency program has enjoyed strong popular support and has succeeded in squeezing monthly inflation to near zero. We believe the Sarney administration will maintain rigorous controls over prices for most or all of this year and, consequently, probably will depress average inflation for 1986 to about 75 percent. In our view, the program also will slow economic growth this year 4 to 5 percent by restraining wages and Brazil is likely to improve its ability to service its $100 billion foreign debt by registering another $12-13 billion trade surplus this year, in part because of surging coffee revenues and sharply falling oil expenditures. Also, a recent restructuring of 1985 and 1986 bank debt coupled with declining interest rates will reduce debt servicing costs substantially. We believe economic achievements of this order will allow Sarney to retain the support of the centrist political majority and the military while keeping the left off balance, particularly Leonel Brizola, the Governor of Rio de Ja- neiro and a presidential aspirant. As a consequence, we expect Sarney to Secret ALA 86-10028 June 1986 -,, Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Secret in 1987 that is to reshape Brazil's political system. emerge strengthened from the key gubernatorial and congressional elec- tions this fall and to play a crucial role in the drafting of a new constitution over a fairly smooth transition process. Sarney's political fortunes, however, will remain hostage to the health of the economy, which could still weaken as the result of any one of several factors. Governmental fiscal vacillation in the face of interest group pressures, for example, could lead to continued expansion of the public deficit and the monetary aggregates, not only rendering impotent the emergency program but triggering resurgent inflation. Under deteriorating economic conditions, leftist groups probably would stir social discontent, make considerable gains in the congressional elections, and prompt a reaction from Brazilian conservatives that eventually would lead to a highly polarized environment. On balance, however, we believe that such a souring of events will not occur and that Sarney will continue to preside policy initiatives. We expect a politically and economically secure Sarney administration to strive to maintain reasonably harmonious relations with the United States, although some frictions will undoubtedly continue even under the best of circumstances over trade, foreign investment, and debt policies. For the most part, his administration should continue to be moderately sympathet- ic-though not acquiescent-to US concerns on arms sales to pariah states such as Libya, narcotics control, and blunting Cuban and Soviet adventur- ism in South America. If the economy unexpectedly weakened and Sarney's political position deteriorated, however, he might take policy positions inimical to US interests, becoming more confrontational on debt policy-particularly if there was a concomitant rise in US interest rates or a spate of protectionist legislation-and less cooperative with US foreign Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Key Judgments Sarney Strengthens Political Standing Emerging From Neves's Shadow 1 A Return to Rapid Economic Growth 3 Inflation Surges 5 Avoiding Pitfalls in the Economic Plan 7 Keeping the Left in the Wings Implications for the United States Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Declassified in Part - Sanitized Copy Approved for Release 2011/12/13: CIA-RDP88T00768R000200270001-5 Secret Figure 1 North Atlantic /Rw G.ande \ do Norte ) Natal ~. , J Piaui pararltiP'Joiio essor