Lula's progress. Ok, lets leave aside the gunfight in the slums and the children on the streets and other assorted teary-eyed non-sense that make some people feel virtuous (boy ain't I terrible?). Teary-eyed non-sense is used by people who, by not understanding a complex issue take the easy way out of singling out easy understandable issues that catches the eye on the popular press.
Lula's progress.
FT.com site; May 06, 2003
After last year's financial crisis, not even the most foolhardy optimist could have expected Brazil to return to international capital markets so soon and so successfully. But euphoria should not blind Brazil's political establishment to the need for far-reaching reforms of the pension and tax system.
<<after the self-serving pre-election downgrades>>
Last Tuesday investors were prepared to buy Brazil's $1bn (£620m) international bond six times over, even though the issue will include an innovative clause that allows for changes in its terms with less than 100 per cent approval from bondholders. Standard & Poor's, the credit rating agency, upgraded its outlook on Brazil. On May 2 the yield spread over US Treasuries (the most widely accepted measure of political risk) fell below 8 percentage points.
<<It is still the same Lula, as a candidate, he wasn't trustworth, as president he is. I wonder why Argentina's Kirchner is not being a cause for downgrade!!!>>
Caution is required for two reasons. First, investor enthusiasm is partly inspired by the depressed outlook for mainstream markets.
<<Busts elsewhere are good for Brazil and that is a tendency we want to continue seeing.>>
In relative terms, Brazilian yields - still in excess of 11 per cent - are attractive and offer a premium of roughly 2 percentage points over comparable emerging market assets. Second, the appreciation of Brazil's currency that has accompanied the rally in prices could depress export growth, halting the steady current account improvement that has reduced external vulnerability.
<<Not accurate. A R$ with parity to dollar didn't help Brazil export like mad when the US economy was booming under Clinton. Now a higher R$ doesn't matter anymore since we are going to a long recession>>
The Real has gained more than 20 per cent against the US dollar so far this year and this week fell below R$3 to the dollar for the first time since August.
Equally, however, the rally in the markets is creating the real possibility of a virtuous economic cycle. Currency strength and lower international rates will help to reduce the country's debt burden. Inflationary pressures - triggered by last year's sharp depreciation of the Real - have been damped, creating the potential for an eventual reduction in domestic interest rates from the current level of 26.5 per cent. That in turn should help increase economic growth beyond current expectations of about 2 per cent for 2003.
In this situation, it is encouraging that President Luiz Inácio Lula da Silva is pressing ahead with pension and tax reforms. Proposals submitted to congress last week envisage an increase in Brazil's retirement age to levels considered normal in richer countries. The tax plan means that Brazil is taking the first step towards changing a system that penalises productive activity and job creation.
Although neither of the proposals submitted to congress last week is ideal, they are important moves in the right direction.
The biggest risk now is that the reforms could become bogged down in congress because trade unions and other groups will undoubtedly seek to dilute the package.
It is important that Mr Lula da Silva and his government stick to their path and that legislators act responsibly. If Brazil is to grow faster on a sustainable basis and generate the resources it needs to tackle social problems, change in these areas is vital. |
