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Emerging mkt down as Brazil package seen tax-heavy
NEW YORK, Oct 29 (Reuters) - Emerging market bond prices ended lower Thursday as investors questioned the viability of
Brazil's fiscal program as sufficient enough to pull it out of an economic and financial crisis.
Brazil Wednesday announced a broad and comprehensive $84 billion three-year fiscal package that encompasses a array of
spending cuts combined with tax increases aimed at bringing down the government's fiscal and current account deficit.
But portfolio managers in the U.S. said the package depends too heavily on higher taxes and much less on spending cuts, which are essential to reviving the
economy, expanding revenues and cutting short-term interest rates.
''I'm disappointed. The package relies far too much on tax revenue measures without attacking any of the core problems like social security,'' said Michael
Rosborough, portfolio manager at the Pacific Investment Management Co. (PIMCO), one of the largest bond fund managers in the United States.
Brazil's huge social security bill is one of the factors contributing to an endemic fiscal deficit, economists say.
''They need to cut expenditure drastically, cut social security drastically. These are problems that are going to haunt them for years,'' said Rosborough.
In Brazil, several business leaders criticized the government's attempts to raise taxes. Of the $23.5 billion savings seen in 1999, nearly half will come from higher
taxes.
Some U.S. money managers were net sellers of emerging market bonds on Thursday, but traders said volume remains low.
Money managers said it is critical for Brazil to retain the confidence of both local investors and foreign banks. And for that, Latin America's largest economy needs
to move quickly to push the package through Congress.
''Now, it is purely and simply a game of confidence with Brazil,'' said Hari Hariharan, portfolio manager at Santander New World Investments.
''Warm and placating statements are not enough for a largely cynical and somewhat wary market.'' |
