FOCUS - Moody's flashes warning sign on Brazil
Reuters, Thursday, December 04, 1997 at 14:15
LONDON, Dec 4 (Reuters) - Brazil faces serious difficulties that have begun to threaten its economic stability as confidence in its anti-inflation programme ebbs, Moody's Investors Service said on Thursday.
While the ceiling on Brazil's sovereign ratings was not yet compromised, the New York-based credit rating agency said
further pressure on the real was likely.
"Among the most serious difficulties are its overvalued currency, its huge current account deficit, the delays in implementing vital adjustments and structural reform policies," Moody's said in a report.
Approval of fiscal measures was critical because monetary policy alone could become ineffective if maintained too long, Moody's said.
Brazil has a sovereign ceiling of B1 for bonds, B2 for bank deposits from Moody's. Its short-term sovereign ceiling is "not
prime."
Moody's said the "Real Plan" was Brazil's most successful stabilisation and currency reform programme of the past 15 years -- resulting in the defeat of inflation and helping to reduce the population living below the poverty line.
"However, a stubbornly high fiscal deficit threatens stability," Moody's said. "The fiscal deficit is the single most important weakness and probably the most obvious threat to financial and macroeconomic stability. Some progress has been made in terms of the fiscal consolidation of the overall deficit, but the financing needs of the public sector remain high."
Moody's said Brazil's social security system remained the single most important cause of the deficit and dealing with these problems required constitutional amendments.
"The process of approving constitutional amendments is complex, but insiders have dragged the process out in an attempt to minimise their losses through complex rounds of negotiation that also involve shifting political alliances," Moody's said.
"The fiscal reform essentially has no chance of approval until after the October 1998 presidential election," it said.
External accounts have deteriorated, Moody's said. The current account deficit widened to about 4.5 percent of GDP ($40 billion) in 1997 from 0.3 percent ($1.7 billion) in 1994, reflecting a sharp deceleration in exports as domestic demand recovered and as imports rose rapidly.
"These developments point to a permanent structural upward shift in the country's imports, which has not yet been matched by a sustained increase in export values," Moody's said.
The recent fall in the Brazilian stock exchanges was quite clearly a result of a contagion effect from the worldwide turmoil, Moody's said.
But if the current account deficit had not already been at the edge of the red flag zone then Brazil would have been less vulnerable to speculative attacks on its currency.
"Even in the event that no other attack on the currency occurs, domestic demand will be adversely affected in the next few months," Moody's said.
While monetary authorities responded rapidly and forcefully to the pressures on the exchange rate in October and were taking steps that should lead to improved fundamentals, further pressures on the currency could not be discounted.
"The sharp increase on the basic reference interest rate was certainly a sign of strength and decisiveness on the part of the
authorities, but if the interest rates remain extremely high for too long a period it is likely to transform into a weakness,"
Moody's said.
uk.governmentbonds.newsroom@reuters.com))
Copyright 1997, Reuters News Service
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