FOCUS-Brazil capital exodus thins, fiscal plan key
Reuters Story - November 03, 1998 14:37
By Mary Milliken
SAO PAULO, Nov 3 (Reuters) - Brazil's capital exodus slowed sharply in October to $1.89 billion from $18.88 billion in crisis-torn September, but could resume if the government fails to come good on its fiscal austerity plan, economists said Tuesday.
"The parameters are very much tied to progress with the fiscal plan, and in 30 days or so we should know how it is going," said Odair Abate, chief economist at Lloyds Bank in Sao Paulo.
By that time, Brazil's Congress will have shown how willing it is to pass the more prickly aspects of the three-year fiscal plan unveiled last week, such as cuts into civil servant privileges and higher taxes.
Also by the end of November, Brazil should know the size, timing and conditions of a financial aid package led by the International Monetary Fund, expected to amount to between $30-45 billion.
If the fiscal plan and IMF package fall into place, Brazil should end the year with a comfortable foreign capital flow situation.
"I think the trend is toward stability, but the flows will continue to be negative," said Diniz Pignatari, director of foreign exchange at ING Bank in Sao Paulo.
Pignatari expects Brazil to lose a net $2 billion through its exchange market over the next two months, while the country's foreign reserves will fall to an "acceptable" $40 billion. Reserves were $43 billion to $44 billion last week.
Brazil needs a steady flow of dollars to finance its high current account deficit, now at 4.4 percent of GDP, and its gaping budget deficit, equal to 7 percent of GDP.
Capital outflows through the commercial and floating foreign exchange markets in October of a combined net $1.89 billion is already a big improvement on September and August, when a net $31 billion left the country.
Emerging market investors, spooked by Russia's mid-August devaluation and debt default, unloaded Brazilian assets and left the country's foreign reserves at $45 billion at end-September from $70 billion at end-July.
At the height of the exodus in mid-September, the Central Bank jacked up its key lending rate to 49.75 percent from 19.0 percent to stem the bleeding.
But even with the attractive interest rates, outflows continued to outpace inflows almost every day and the October gap would have been even deeper if not for one-off direct foreign investments worth about $7 billion.
The bulk of those inflows, or $4.9 billion, came in the form of early payments from Spain's Telefonica SA , Iberdrola SA , and Portugal Telecom for units in the privatization of telecommunications holding Telebras on July 29.
For November, the capital flows will see some respite from debt redemptions. Corporate Eurobonds redemptions this month are expected at around some $300 million from $1.6 billion in October, according to market estimates. Brady bond redemptions, which take place outside Brazilian exchange markets, should fall to $50 million from $1.5 billion in October.
This month is also likely to see a slowdown of corporate dividend remittances after multinationals repatriated capital ahead of schedule when devaluation of Brazil's currency looked like a real possibility in September.
"Many people already sent their money and there's not a lot left over that can leave, especially speculative money," said Pignatari. "Whoever still has money here is probably going to stay."
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