Brazil Puts The Brakes On Dash To
Economic Chaos
Dow Jones Newswires
SAO PAULO (AP)--Brazil's pledge to adopt fiscal austerity measures in
an effort to break its headlong dash to economic chaos has received high
marks overseas, but greeted with skepticism at home.
On Wednesday, President Fernando Henrique Cardoso said his
government planned to tackle the economy's main Achilles heel - a budget
deficit equal to 7.3% of gross domestic product (GDP) - and hinted that
taxes would be increased.
U.S. Treasury Secretary Robert Rubin praised Cardoso's speech, saying it
"highlighted fiscal adjustment and reform as Brazil's national economic
priority."
Enrique Iglesias, president of the Interamerican Development Bank said
the speech was "an excellent message to the international financial
community".
But many businessmen fear that any increase in taxes would only make
matters worse.
"The country already has the highest tax burden in the world, responding
for 32% of GDP," said Antonio Ermirio de Moraes, owner of the
Votorantim Group, Brazil's largest business conglomerate. "A tax increase
would only help the underground economy grow."
Synesio Batista da Costa, president of the Brazilian Toy Manufacturers'
Association is convinced taxes will be increased, leading to a sharp drop in
consumer sales, "especially during the Christmas season."
The president's remarks, widely seen not only as an effort to reassure
international investors, but also to prepare Brazilians for belt-tightening
economic measures, also heightened fears of recession and unemployment.
"In the first quarter of 1999, there will either be recession or economic
stagnation," said economist Paulo Nogueira Batista of the Getulio Vargas
Foundation, Brazil's leading business administration school. "And as a
result, unemployment will grow."
Brazil's unemployment rate is around 8%, its highest level since Cardoso
took office four years ago.
And next year, "the joblessness rate could hit double digit figures - the
worst in all of Brazil's history," said Sergio Mendonca of DIEESE, a labor
union-funded socioeconomic research center.
Like other emerging markets, Brazil has been buffeted by the turmoil in
world financial markets with a loss of investor confidence and a strong
outflow of capital. The country's foreign reserves have fallen below $50
billion from the $70 billion posted at the end of July.
To prevent a collapse of Brazil's currency, the real, and stem capital flight,
the government on Sept. 10 raised interest rates from 29.75% to 49.75%.
Although slowed down, the outflow continues.
On Wednesday $531 million left the country, bringing the total for the
month to $16.79 billion.
Protecting the real with high interest rates is a double-edged sword,
economists point out.
On one hand they curtail capital flight, but on the other they aggravate the
deficit. According to press reports, government securities account for
nearly 85% of Brazil's public debt of $296 billion.
Although the austerity measures announced by Cardoso are potentially
unpopular, they are not expected to hurt his bid for a second term in
office.
A survey published earlier this week showed that Cardoso would easily
win the Oct. 4 elections with 47% of the vote. His nearest challenger, Luiz
Inacio Lula da Silva, of the leftist Workers Party, has 24% of the vote.
Cardoso's remarks coupled with signals that the United States may lower
its interest rates buoyed the Sao Paulo Stock Market, Latin America's
largest, which closed almost 11% on Wednesday.
On Thursday the stock market's Bovespa index closed down 6%, mainly
because of profit taking and the poor performance of the Dow Jones
Index. |
