US investors wonder whether Brazil can defend real
Reuters, Thursday, September 10, 1998 at 12:39
By Apu Sikri
NEW YORK, Sept 10 (Reuters) - With Brazil's foreign exchange
reserves eroding at an average rate of about $1 billion a day
despite rising short-term interest rates, international
investors were questioning whether the country can avoid a
currency devaluation.
"The outflows of capital are huge. The question is, what is
the pain threshold of the government. How low are they willing
to let the reserves go," said Raul Elizalde, fixed-income
strategist at Banco Santander. "If this continues, the
possibility of a change in foreign exchange policy is high."
The government of President Fernando Henrique Cardoso,
facing re-election on October 4, has announced a series of
measures, including emergency cuts in fiscal spending.
Meanwhile, the central bank has hiked short-term interest rates
has been selling dollars on the foreign exchange markets to
slow the real's decline.
But analysts said these measures have not restored
confidence in Brazil. Investors were unimpressed the fiscal
spending cuts announced on Tuesday. To complicate matters,
analysts noted, government hopes for more revenue from
privatization of public companies could be dashed as bank
financing for mergers and acquisitions has dried up.
Given these limitations, some analysts wondered how long
the government can continue to support the currency through
reserves, which are currently estimated at $55 billion.
"The noose is tightening on Brazil," said Hari Hariharan,
portfolio manager at Santander New World Investments. "It has a
huge fiscal deficit, it has huge reliance on external
financing, and it needs to roll over a large amount of
short-term debt. It is no different from the set of issues that
plagued Russia towards the end," he said.
Russia effectively defaulted on domestic debt last month
after declaring a restructuring that returned investors as
little as 10 cents on the dollar.
Pressures building on the Brazilian real have pummeled
currencies across Latin America, pulling down stock markets
across the region and boosting interest rates.
The overnight rate on Mexican cetes soared 6.5 percentage
points to 40 percent Thursday after the peso weakened to 10.535
to the dollar. Short-term rates in Brazil are now at 29
percent.
Meanwhile, the Brazilian central bank was again seen
selling dollars in the foreign exchange market to keep the real
within a pre-set currency band. The real was trading at 1.17 to
dollar on Thursday.
Investors and bankers contend that President Cardoso will
do everything in his power to defend the currency - a strategy
that has been central to his economic policy, known as the
"real plan."
"Cardoso has so much at stake with the real plan, he can't
let it fall apart three weeks before the elections," said
Michael Rosborough, senior portfolio manager at Pacific
Investment Management Co. (PIMCO).
"The government could raise interest rates again, announce
yet another set of fiscal measures. They will do everything in
their power to muddle through 'til the elections," said
Rosborough.
Additionally, Brazil could set import tarriffs and
introduce new hedging instruments in the foreign exchange
markets, said Jaime Valdivia, strategist for Latin American
debt at Morgan Stanley Dean Witter.
But some experts doubted whether Brazil could do much to
protect the currency. They noted that the country's fiscal
deficit towers at 7.27 percent of GDP and it has about 100
billion reais in short-term debt coming due by the end of the
year. About 60 percent of that debt pays floating interest
rates.
The central bank could raise rates again to keep wealthy
local investors attracted to the local debt market. But higher
short-term rates would also increase the government's spending
on interest payments, further widening the budget deficit.
Citing these concerns, major rating agencies have either
lowered their ratings on Brazil or put them on watch for a
downgrade.
Copyright 1998, Reuters News Service
|
