FOCUS - Brazil dollar flight eases, stocks soar
Reuters, Tuesday, September 15, 1998 at 19:57
By William Schomberg
BRASILIA, Sept 15 (Reuters) - Brazil's stock market soared
16 percent on Tuesday and dollar outflows slowed, giving Latin
America's biggest nation some breathing space amid its worst
economic crisis in years.
But economists warned the government had to take bold
measures to slash a budget deficit and stave off the threat of
a devaluation that could rock world markets.
Shares in Sao Paulo, which have lost half their value so
far in 1998, soared as local investors relished a pledge from
the industrialized G7 nations to support battered emerging
markets.
The stock market rally followed an interest rate hike last
week to 50 percent, which helped cut dollar flight to $898
million on Monday from an average $1.5 billion a day during the
first two weeks of September.
"We're in a truce but the government has shown once again
that it knows how to react to a crisis," said Alvaro Lopes,
vice president of Banco Bozano, Simonsen, a bank in Rio de
Janeiro.
"We're not out of it yet and the task in hand now has to be
a cut in the fiscal deficit which is where Brazil has made
least progress in the last four years," Lopes said.
Brazil survived similar crises in 1995, after Mexico's peso
crisis, and in 1997 at the start of Asia's crash.
But President Fernando Henrique Cardoso, seeking reelection
in less than three weeks, now faces the biggest challenge to
his anti-inflation plan, which has been successful.
The crisis began when Russia devalued the rouble in August,
triggering investor panic about emerging markets worldwide.
Analysts fear Brazil relies too heavily on increasingly
scarce foreign capital to cover a huge budget deficit and that
despite $50 billion in foreign currency reserves it might run
out of funds to defend the national currency, the real.
There is also concern the government may find it hard to
convince jumpy markets to accept new debt to roll over about
$75 billion in paper due between now and the end of the year.
Global economists are still weighing the chances of a
Brazilian devaluation, and few doubt the impact would be
limited to Latin America if it were to occur.
"If Brazil does devalue, it's one of the major risks to the
world economy, not just Latin America," Robin Bew, chief
economist with the Economist Intelligence Unit in London, told
Reuters in Spain.
Leading Spanish companies with investments in Latin America
have been pummeled on the Madrid stock market in recent weeks.
U.S. officials also are worried about the impact of a
Brazilian economic collapse.
U.S exports to Brazil totaled nearly $8 billion in the
first seven months of the year and direct U.S. investment in
the country stands at more than $37 billion.
U.S President Bill Clinton urged rich nations on Monday to
let the International Monetary Fund make emergency loans to
Latin America. Cardoso planned to call Clinton later on
Tuesday, a presidential spokesman said.
But there was a virtual consensus among Brazilian
economists the country must take the initiative and urgently
cut a budget deficit now running at 8 percent of gross domestic
product.
Last week's announcement of $3.4 billion in cuts failed to
impress analysts who said the savings would be wiped out by
higher debt costs following last week's interest rate hike.
"There are three weeks left until the elections and Cardoso
has enough momentum and credibility to stand up and say that
tougher cuts have to be made," said Denis Parisien, an analyst
with Dresdner Kleinwort Benson bank in New York.
Some local observers doubt whether Brazil can make further
savings. "There is no big egg out there they can smash. They're
on a very tight budget already," said a foreign diplomat.
Government officials say long-awaited structural reforms
will be made a priority in Congress after the elections.
The head of the lower house, Michel Temer, told reporters
on Tuesday that a bill to simplify Brazil's complex tax system
would be rushed through the lower house by December.
Copyright 1998, Reuters News Service
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