NY Times. Analysts Warn of Dangers to Brazil's Economy
nytimes.com
September 5, 1998
By DIANA JEAN SCHEMO
IO DE JANEIRO, Brazil -- With Brazil's stock market in a nose
dive and the central bank spending $1 billion a day to defend the
currency, economists warned that despite the strengths of Brazil's
economy, investor panic could plunge the region into decline.
Brazil's market fell by 5.8 percent Friday, following a decline of 8.61
percent on Thursday, its second-worst in history, triggered, in part, by a
downgrading of Brazilian bonds and notes by Moody's Investor service.
The markets were not soothed by a televised appeal by President
Fernando Henrique Cardoso on Thursday night for a "national pact for
fiscal adjustment" or by criticism of the Moody's assessment by Brazilian
officials.
To the contrary, stocks plunged further Friday as a low-ranking U.S.
Treasury official called the Brazilian currency "unarguably overvalued."
The Treasury later disavowed the comments as a personal opinion not
reflecting the department's policy.
Investors worldwide have been fleeing emerging markets, and Brazil has
been caught in the crosscurrents. In the month of August alone, Brazilian
equities fell 40 percent, with similar losses in stock exchanges around the
continent.
Brazil's current account deficit hovers at nearly 4 percent of gross
domestic product. The country's failure to cut government operating
expenses, particularly civil service costs, has put the country in a difficult
position as credit tightens for emerging markets around the globe.
Citing these structural weaknesses, Moody's downgraded its rating of
Brazilian bonds and notes to B2 from B1 and the ceiling for foreign
currency bank deposits to Caa1. It also downgraded three Brazilian
banks to C from C plus.
The Brazilian finance minister, Pedro Malan, in Washington for a
meeting of Latin finance ministers with the International Monetary Fund
that ended Friday, lashed out at Moody's analysts, saying they were
compensating for earlier optimistic ratings in Asia by turning more
cautious toward Latin America.
Michel Camdessus, managing director of the fund, said that many of the
problems faced by Brazil and Latin countries derived from panic
elsewhere in the world rather than lack of will to take tough economic
measures.
But with markets throughout the region plummeting, Camdessus
acknowledged that the situation for Latin America was "dangerous." He
said that "a degree of panic" among investors had led to "an excessive
and unfortunate pressure" on many countries in Latin America. "It's true
that if this persists a number of countries will have to tighten their
policies," Camdessus said.
In his speech Thursday night, Cardoso, who is favored to win
re-election Oct. 4, did not announce any new initiatives. His talk
restated his government's commitment to Civil Service, social security
and tax reforms that stalled during his first term. "We have to continue a
program of fiscal adjustment," he said.
With roughly $58 billion reported in foreign reserves, Brazil has
substantial resources to stabilize its currency. Under Cardoso, the
country has made headway toward market-oriented reforms, privatizing
state industries and slaying chronic hyperinflation.
Analysts say the central bank has been spending an average of $1.3
billion a day since Sept. 1 to protect the Brazilian currency, the real,
while Friday's O Globo newspaper reported international reserves had
fallen $15.8 billion since August 1. A spokesman for the central bank,
usually forthcoming with information, would not confirm the figures or
provide others.
Malan has ruled out a devaluation, but Brazilians are buying dollars to
cover themselves. The difference between the official and informal rates
of exchange has been widening, with exchange houses offering 1.27
reais against the dollar, compared with an official rate of 1.17 reais.
Traditionally, the difference has run about two or three cents.
Under Mercosur, the customs union joining Brazil with Argentina,
Uruguay and Paraguay, Argentina's exports to Brazil quadrupled, and
now represent more than 25 percent of its export business. With
Argentina's peso pegged to dollar reserves, a devaluation in Brazil
would send instant tremors through Buenos Aires. "Safely and securely,
they would be in a deep crisis," said Alexandre Barros, a Brasilia-based
political consultant .
Paulo Leme, economic research director of emerging markets at
Goldman, Sachs, argues that industrial nations must come up with
solutions, like a lowering of U.S. interest rates, replenishing the
International Monetary Fund's bailout capacity and restoring stability to
Japan, to help emerging markets. "These are not isolated viral cases, but
an epidemic," he said.
Brazilian firms are carrying a foreign debt of $108.5 billion, up from
$37.3 billion three years ago. Some $11 billion will come due before
next July, and if international lenders decline to renew the loans, the
companies will turn to the central bank.
One emerging-markets specialist, who requested anonymity, said that
while investment analysts pick over the differences between developing
markets, investors these days act on the similarities. Underpinning the
rage for emerging markets were assumptions -- that currencies do not
devalue, that countries do not default -- that have been shattered with
Russia's collapse.
"The real contagion is not something I'm worried about, it's the financial
contagion," the analyst said. "Everybody agrees that if the Hong Kong
peg were to go, the attack on Brazil would be relentless, until there were
no international reserves left."
"It's not because there's a real connection between the economies," he
added. "It has everything to do with perceptions, and the psychosis of
the market."
Perhaps for that reason, a letter to the editor of The Wall Street Journal
from the lower-level Treasury Department official was quickly
disavowed. The official, Britta Hillstrom, wrote that while "Brazil's real is
unarguably overvalued, a destructive devaluation is not the only
solution," and said the country could move the exchange rate band. A
spokeswoman for the Treasury Department said those "were absolutely
not the views of the Treasury Department."
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