U.S. analysts wary on Brazil despite possible help
Reuters, Thursday, September 24, 1998 at 16:57
By Hugh Bronstein
NEW YORK, Sept 24 (Reuters) - Recent indications that
international lenders would step in before Brazil devalues its
currency have not been enough to induce U.S. investors to
reenter Latin America's largest economy, U.S. analysts said on
Thursday.
And while they took heart this week when Brazil's president
said he planned to introduce tax hikes intended to close the
country's yawning fiscal deficit, investors said they needed to
see results before committing themselves.
"We're cautious around Brazil," said Robert Koenigsberger,
managing director of Gramercy Advisors, which manages an
emerging markets fund.
"We've seen euphoria over the last couple of days about
Brazil and about markets in general," he said. "But we're
concerned the markets are reacting to higher prices rather than
changes in the fundamental picture."
The picture in Brazil is dominated by the government budget
deficit, which stands above 7 percent of gross domestic
product.
This in combination with Latin America being virtually cut
off from international credit in the wake of Russia's August
debt default, makes for a potentially dangerous situation,
analysts said.
Emerging market debt prices rallied earlier this week when
Brazil President Fernando Henrique Cardoso said he was willing
to accept help from multilateral lending institutions such as
the International Monetary Fund should the country's currency
come under increased pressure.
The market also took heart when Cardoso said he would
introduce fiscal reforms after the October 4 election, in which
he is expected to win a second term.
Analysts said Cardoso knows he enjoys a big enough lead in
the public opinion polls that he can afford losing some backers
by suggesting unpopular steps, like possible tax hikes.
"A lot of expectations have been created but we'll have to
see what is actually announced after the election, and, more
importantly, what is actually implemented," said David
Sekiguchi, an emerging markets strategist at JP Morgan, the
U.S. bank.
While Cardoso's willingness to take responsible steps to
close the deficit is a matter of record, the cooperation of
Brazil's Congress is less certain, Sekiguchi said.
Ratings agency Standard & Poor's has a negative outlook on
Brazil.
"The government has a significant fiscal adjustment that it
has to make and reforms that have to be implemented," said John
Chambers, deputy head of S&P's sovereign group.
"We think that Brazil has a window of opportunity to
implement those fiscal reforms soon after the election,"
Chambers said. "But if they do not take that opportunity,
investor confidence is going to be hurt and it is just going to
increase the pressure on the real."
A wave of capital flight, that slowed two weeks ago after
Brazil hiked interest rates to nearly 50 percent, has drained
some $20 billion this month from hard currency reserves, which
now stand at about $48 billion.
Reserves are Brazil's best weapon against devaluation and
money borrowed from the IMF and others would go toward shoring
up the local currency, the real.
A strong real is the backbone of Cardoso's four-year
inflation-busting drive, which has brought price growth down to
about 2 percent a year from nearly 3,000 percent when he was
elected in 1994.
Copyright 1998, Reuters News Service |
