Is the Brazil crisis for 'real'?
By Paul E. Erdman, CBS MarketWatch
Last Update: 3:28 PM ET Jan 11, 1999 Columns & Opinion
SAN FRANCISCO (CBS.MW) -- The latest reason/excuse/explanation of a renewed weakening of the dollar, and a temporarily faltering stock market, is the fear that Brazil is going the way that Mexico went a few years ago, and that it will drag all of Latin America down with it.
The key to this is whether or not Brazil will be forced to devalue the real.
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Paul E. Erdman is the author of the recently published novel "The Set-Up."
That, in turn, is a function of whether or not investor confidence in Brazil can be prevented from collapsing further. Should it not, Brazil could indeed go down the same route that Mexico went just four years ago.
Then, as a result of capital flight, Mexico lost all of its currency reserves, was unable to service its short-term foreign debt ($30 billion in tesabonos), and had no choice but to devalue the peso and raise domestic interest rates to sky-high levels. Deep recession followed.
Likewise today where Brazil is concerned. What ultimately stands between now and a forced devaluation are Brazil's foreign exchange reserves. They peaked at $75 billion early last year. Then, as a result of capital flight, plummeted to $35 billion by year's end. By now they are probably under $30 billion and still falling.
One key to whether this process will end with a forced devaluation of the real depends on whether or not investors are convinced that the Brazilian government's austerity program will work, a program designed to create a domestic climate of low inflation and a stable real by creating annual fiscal surpluses of 2.6% of GDP in 1999, 2.8% in 2000, and 3% in 2001.
Should this program succeed Brazil's debt-to-GDP ratio would stabilize at 44%, as compared US ratio of 65%, and Japan's debt-to-GDP ratio of over 100%. So from that standpoint, the situation in Brazil is not nearly as bad off as some observers believe. But it is tottering on the edge where international liquidity is concerned.
How close is Brazil to running out of money?
In searching for the answer to this, Offitbank, in a recent report, made a' detailed calculation of Brazil's total financing needs in 1999. It came to the conclusion the Brazil's net financing requirement will be $29.8 billion.
Will it have the resources to cover that? Offitbank gives an emphatic yes. If you add the $37 billion which will become available under the IMF/G7 support program to the $25 billion of currency reserves which could be left after the current mini-panic subsides, it will mean that Brazil will still have double the amount of reserves necessary to cover its international payments in 1999. The real, then , will not be devalued.
If this message sinks in, my guess is that the worries about Brazil going the way of Mexico in 1994/95 or Russia in 1998 will subside. Those speculators who live off of trouble will then have to look elsewhere.
Economist and author Paul E. Erdman is a columnist for CBS MarketWatch.
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