Will the real Jeremy Smith please stand up...
Brazil's Congress to decide on fate of fiscal plan
Reuters, Thursday, October 29, 1998 at 03:28
By Jeremy Smith
RIO DE JANEIRO, Oct 29 (Reuters) - Brazil's government will
submit a $84 billion austerity plan for the next three years on
Thursday to the country's notoriously unpredictable Congress,
where its success or failure will ultimately be decided.
The package of proposals, presented by Finance Minister
Pedro Malan to the nation on Wednesday, aims to pull Brazil
back from the edge of an economic abyss and calm worldwide
fears that Brazil could be forced to devalue its currency, the
real.
But the government's main challenge now, analysts say, will
be to win approval from lawmakers.
The program of budget cuts, tax hikes and other measures
seeks to save $23.5 billion in 1999 and even more in 2000 and
2001, paving the way for an expected $30 billion in credits
from the International Monetary Fund (IMF) and other lenders.
U.S. Treasury Secretary Robert Rubin welcomed Brazil's new
fiscal reform program but was quick to warn that it had to be
implemented "promptly and convincingly".
Battered markets worldwide had waited weeks for the plan,
hoping that Brazil would come to grips with its gaping budget
deficit and avoid the fate of Russia and Asian nations which
have been hit by disastrous currency devaluations.
They fear that a full-blown crisis in Brazil, especially a
devaluation, might trigger a recession in all of Latin America
and hamper economic growth worldwide. Brazil's budget deficit
amounts to some eight percent of its gross domestic product
(GDP).
Brazil, the world's eighth largest economy, has been poised
on a knife-edge since Russia devalued in August. The economic
contagion sparked huge dollar outflows in Brazil and forced the
government to hike interest rates to a crippling 40 percent.
During the presentation, Malan repeated that Brazil would
not alter its foreign exchange rate policy, in an attempt to
quash speculation that the plan called for a devaluation.
Analysts said although the plan contained few real
surprises, it still promised enough to fend off financial
crisis and devaluation -- but only if the government could
persuade potentially hostile lawmakers to implement it.
"This is certainly enough if they were to do everything, it
would be enough to stabilize the fiscal situation and bring the
nominal deficit down to a sustainable level," said Peter West,
chief economist at BBV Securities in London.
"But it all hangs on congressional approval. They must get
these measures signed and sealed by 1999."
The country's unruly Congress has already proved a thorn in
the side for Cardoso, re-elected earlier this month.
Despite his success in taming Brazil's once chaotic
economy, the president has failed to win complete approval for
essential structural reforms over the last four years.
And there are already signs that the government will have a
fight on its hands to approve the new measures. Several senior
politicians say they oppose cuts to social spending and others
grimace at the size of the proposed tax increases.
For example, Congress' president said he could not
guarantee the approval of a higher financial transaction tax,
which was nearly doubled to 0.38 percent to raise more than $6
billion next year.
"(The government) wants 0.38 percent, but whether Congress
will approve that or not, I can't guarantee," Sen. Antonio
Carlos Magalhaes said.
Opposition gains in Sunday's state gubernatorial elections
have also raised doubts about how much can be saved by cutting
jobs at the state level, a key part of the government's plan.
While Congress may make the sacrifices, analysts are less
confident that the state governments will fall into line.
Last Sunday saw state gubernatorial elections where three
of the most indebted states -- Rio de Janeiro, Minas Gerais and
Rio Grande do Sul -- were won by opposition candidates.
Governors elected on party platforms opposed to the
government are to meet in Brasilia Thursday to discuss a joint
reaction to the fiscal plan. Voting on the proposed measures is
expected to begin later in November.
Even if the new plan works, Brazil faces a grim 1999. A
forecast included in the document sees the economy shrinking by
one percent next year, the first time the government has
admitted the possibility of a recession.
Although the success of the plan will hinge heavily on the
collaboration of Congress, analysts said the chilling prospect
of a return to the days of soaring inflation and economic chaos
suggested it would ultimately deliver, the economists said.
"The people in Congress know it is imperative to get
reforms though," said Jane Heap, Latin American strategist at
Deutsche Bank in New York.
Copyright 1998, Reuters News Service |
