Brazil, Battered By Crisis, Holds Out For Election
05:17 p.m Sep 18, 1998 Eastern
By William Schomberg
BRASILIA (Reuters) - Brazil should get to its Oct. 4 elections without plunging further into crisis, but the outlook for Latin America's bellwether economy is grim, government officials and economists warned Friday.
Battered markets across Latin America enjoyed a rare lull Friday amid growing confidence that the United States, the International Monetary Fund and others would stand by Brazil.
''Brazil has won some time to get to the elections without huge risk,'' said Jose Antonio Pena, chief economist with BankBoston in Sao Paulo.
''But we can't keep delaying our attack on our problems ... Once the elections are over, the markets will want the government to announce what it plans to do,'' he said.
As Brazilian officials and monetary authorities in Washington discussed support, shares in Sao Paulo rose a nervous 1.3 percent and a flood of dollar outflows from Brazil slowed to a trickle.
Mexico's peso currency rallied and share prices in Argentina held steady on hopes that Brazil's outlook was improving.
The United States again stressed its backing for Brazil.
''Brazil's economy is the largest in the region and its financial stability matters profoundly to both the region and the United States,'' said Secretary of State Madeleine Albright before meeting with Brazil's foreign minister in Washington.
But she hinted that Brazil had to do more to convince the international community that support would not be wasted: ''I will make clear U.S. support for the steps Brazil has taken and must continue to take to respond to the turmoil.''
This week, President Clinton pledged support for Latin America and discussed the crisis with regional leaders.
Brazilian President Fernando Henrique Cardoso stands for reelection in just over two weeks' time. Polls show him heading for an easy win, thanks mostly to his success in slashing once rampant inflation to an expected 1 percent this year.
But Cardoso has roundly failed to tackle an ever-growing budget deficit that has long been a concern of investors and now threatens his image as an economic miracle-worker.
When Russia devalued last month, emerging markets worldwide went into panic and Brazil was hardest hit. About $15 billion was wiped off foreign reserves in the first two weeks of September.
With the inflation-busting real currency suddenly under threat, the government hiked interest rates to a massive 50 percent and announced about $5 billion in spending cuts.
''It's hard to imagine we can advance any further in 1998 than we already have in terms of cuts, but if it's necessary to meet the targets we have set, we will make further cuts,'' said Pedro Parente, a finance ministry official heading an austerity drive.
In a Reuters interview, Parente said the government would also consider raising taxes should the need arise, a move it has so far avoided taking with elections so close.
Another senior government economist said the economic outlook in Brazil was gloomy.
''It's very probable that there will be a reduction in output compared to what was forecast,'' said Andre Lara Rezende, head of the National Development.
Private economists say a recession may be unavoidable. Pena of BankBoston said the government would have to make cuts equivalent of up to 3 percent of GDP to restore faith in the economy. He said the cuts so far announced were equivalent to just 1 percent of GDP.
''1999 is going to be a hard year, but I think it is for a noble cause,'' Pena said. ''We're in a trade-off. Either we accept the pain of fiscal adjustment now or we undermine economic growth for a much longer period.''
Top congressional officials met with Cardoso Friday to sketch out a new timetable for cost-cutting reform bills which have been stuck in Congress for nearly four years.
''We have to give the market the real impression that we are interested in giving Brazil economic stability,'' said Congress president Senator Antonio Carlos Magalhaes.
Among the bills awaiting approval is a reform of the pension system which would help the government plug a huge deficit in the social security system set to pass $20 billion this year.
Copyright 1998 Reuters Limited. |
