Brazil's Fiscal Plan Expected To Slow Growth In 1999
By ADRIANA ARAI
Dow Jones Newswires
SAO PAULO -- Brazil's fiscal adjustment measures aren't out yet, but
economists already picture a gloomy scenario for the country next year.
Analysts anticipate a contraction in gross domestic product that varies
from 1% to 2%, in light of belt-tightening measures built into the multi-year
fiscal plan President Fernando Henrique Cardoso will outline Tuesday at
2200 GMT.
"A slowdown is growth is the cost of the fiscal adjustment plan, but it's
much less painful than what happened in Asia," said BankBoston chief
economist Jose Antonio Pena, citing a staggering GDP contraction of
about 18% in Indonesia expected by economists for this year.
"The fiscal adjustment measures are needed to make the country less
vulnerable to the crisis", he added. Pena projects that GDP will fall
between 1.5% and 2% next year.
Last year, Brazil's GDP growth rate was 3.7%, but the rate dipped 0.1%
in first quarter 1998 reflecting a hike in interest rates last October in the
wake of Asia's financial crisis. GDP rose 1.4% in the second quarter, but
a deepening world financial turmoil has halted the recovery.
Pena said that GDP will shrink unless there's a combination of an
improved international scenario and a rapid implementation of the fiscal
measures. "But that's highly unlikely," Pena believes.
The retrenchment program is designed to generate a budget primary
surplus (without debt servicing) as great as 2.6% of GDP in 1999 or
BRR24 billion (BRR)($1=BRR1.19), by cutting public spending and
raising taxes.
The measures are seen as the last step before Brazil formally requests a
multi-lateral financial aid package led by the International Monetary Fund,
valued at up to $30 billion.
Analysts agree that Brazil's economic activity will be hardest hit in the first
quarter of 1999.
The four variables affecting growth - consumer spending, investment,
government spending and foreign trade - will all suffer from the
government's fiscal plan and high domestic interest rates, analysts said.
In an effort to stem capital outflows following Russia's default on its
domestic debt and devaluation of its currency, the Brazilian Central Bank
more than doubled a key interest rate to 49.75% in September.
"GDP is likely to tumble 3% in the first quarter, then slowly resume growth
again in tandem with a rise in investor confidence in the country," Lloyds
Bank chief economist Odair Abate said. "Unless investor sentiment
improves, interest rates will remain high and dollars should continue leaving
the country."
He predicts that GDP will slump 1% in 1999, noting, however, that his
projections are based on information on the plan leaked to the press in
recent days. "Everything may change depending on what is going to be
officially announced and how markets will react to it," he said.
Regardless of the government's fiscal plans, the first-quarter recession will
be aggravated by high inventory levels from already slowing economic
activity, experts say.
"The typical early-year lull in industrial output will be much stronger in
1999," noted economist Aricio Xavier de Oliveira of local consultancy
MCM Consultores. "And the industrial sector sets the pace for the whole
economy."
As a result of the economic sluggishness, many companies have postponed
investments planned for 1999, even in booming infrastructure sectors, like
telecommunications, that have benefited from privatization.
"Finance comes from abroad and foreign companies and banks will wait
until the crisis is almost fully gone to resume investments in Brazil", said
Alceu Landi, KPMG president in Brazil. "And, this time, foreign investors
won't be satisfied with promises. They'll wait to make sure government
spending is under control."
Brazil's public sector borrowing requirements ended September at 7% of
GDP. The Central Bank hasn't released annualized figures since July, but
analysts say the deficit in the 12 months ended in September neared the
8% mark.
-By Adriana Arai; 5511-813-1988; aarai@ap.org |
