POLL-Brazil's devaluation risk rises in medium term
Reuters, Thursday, October 15, 1998 at 10:12
By Noriko Yamaguchi
SAO PAULO, Oct 15 (Reuters) - The risk of a steep, sudden
devaluation in the Brazilian real in 1998 or 1999 has increased
due to the country's economic crisis, but remains unlikely, a
Reuters poll of economists found.
The poll of 40 economists in Brazil and the United States
found the probability of an abrupt 15 to 20 percent devaluation
between now and the end of 1998 rose slightly to 13.4 percent,
from 12 percent in a previous poll in August.
But the survey, conducted from October 9 to 13, found the
likelihood of a devaluation in the first six months of 1999 rose
more noticeably to 22 percent, from a previous 17 percent.
Brazil, Latin America's largest nation, has been working
with world lending agencies to secure a special credit line
aimed at shoring up its currency, the real, amid steady capital
flight.
Economists say a devaluation in Brazil would probably throw
the entire region into recession, which could provoke a slowdown
in the U.S. economy.
But Brazil's expected austerity drive combined with the
likelihood of financial backing from the International Monetary
Fund and other lenders made a devaluation this year unlikely,
economists polled by Reuters said.
But they said the risk rises in 1999, especially if Brazil
continues to lose dollars.
"Brazil will be forced to devalue if money keeps flowing out
of the country," said Ken Colli, Latin American economist at
Credit Lyonnais in New York. Colli said that if high interest
rates cannot stem the outflow, the government will have to alter
its rigid foreign exchange policy.
The government jacked up prime lending rates to nearly 50
percent per year on September 10 in a drastic effort to plug a
massive wave of capital flight.
Some $30 billion have left local forex markets since August
as investors, frightened that Russia's devaluation may repeat
itself in Latin America, yanked out their cash. That has cut
Brazil's currency reserves -- its best weapon against
speculative attack -- to between $46 billion and $47 billion
now.
Economists say the real is overvalued by anywhere between 10
percent to 30 percent against the dollar, making it a target for
speculators. In addition to the capital flight, economists fear
Brazil will find it increasingly difficult to support the real
as debt financing costs soar on higher interest rates.
"The high interests would inexorably blow up Brazil's
internal debt," said Bob Gay, Latin American strategist at
Bankers Trust New York Corp. Brazil has about 60 billion reais
($50.8 billion) in domestic debt maturing by the end of 1998.
Even so, most economists think Brazil has overcome the risk
of a steep devaluation this year, after President Fernando
Henrique Cardoso, the father of Brazil's currency was re-elected
on October 4.
"If you had asked the same question a month earlier, the
chances of a forced devaluation must have been much higher,"
said Marcelo Allain, economist at BMC Bank in Sao Paulo.
Many economists, including Allain and Bankers Trust's Gay,
predict Brazil may respond to devaluation pressures by speeding
up the rate at which the real gradually depreciates against the
dollar.
The Brazilian Central Bank has been depreciating the real,
which trades in a tightly regulated band, by 7.5 percent a year
since the currency was introduced in 1994.
"The possibility the government should carry out a
maxi-devaluation is zero up to next year," said Masaru Nakayasu,
economist at Banco de Tokyo-Mitsubishi Brasil.
"However, the Central Bank may speed up the rate it
depreciates the real."
Nakayasu predicted Brazil may allow the real to depreciate
by up to 1.6 percent each month, compared with an average 0.6
percent currently. That would result in a depreciation of up to
10 percent in six months.
Economists said the government might also attempt a
"controlled devaluation" of the real, slicing its value either
overnight or over a fixed period.
But that would only be an option if international markets
turn less volatile.
"It could do that when external conditions become
favourable, but the size of the cut would depend on the market,"
BMC's Allain said.
Survey participants were asked the following question:
Question: what are the percentage chances of a 15-20 percent
devaluation in Brazil for the rest of this year and the first
six months of 1999?
(40 responses)
1998 H2 1999 H1
Average 13.4 pct 21.9 pct
Median 10 pct 20 pct
For more details on the poll, including previous results,
please click on <BRAAO> <BRAAP> <BRAAQ>.
Copyright 1998, Reuters News Service
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