Brazil's Forex Move Seen As Boon For Govt
On Fiscal Reform
By STEPHEN WISNEFSKI
Dow Jones Newswires
SAO PAULO -- Brazil's suprise move Wednesday to alter a long-standing
exchange policy, coupled with the resignation of the central bank head,
won't hamper the government's ability to push much-needed fiscal measures
through Congress, and could even boost the chances of speedy approval,
political analysts said.
"What has happened (Wednesday) should bring (President Fernando
Henrique) Cardoso and his government closer to Congress and make
approval of fiscal reform easier," Brasilia-based political consultant Walder
de Goes said. "The government is meeting the demands of several
segments."
Central bank president Gustavo Franco stepped down early Wednesday
amid mounting pressure from various quarters for Brazil to cut interest rates
and implement a more flexible exchange policy.
Newly-appointed central bank head, Francisco Lopes, wasted no time in
announcing the dollar would be allowed to float within a wider band than
previously set, a move that resulted in a 8.2% weakening of the real in late
trading Wednesday.
While the events shook financial markets, sending the Sao Paulo Stock
Exchange's Bovespa Index down as much as 10%, the political effect was
seen as positive.
Brazil's Congress has convened a special session to vote measures included
in the government fiscal plan introduced last October. The plan seeks to
shave 28 billion reals (BRR)($1=BRR1.32) from bloated government
budgets and formed the backbone of an international aid deal worth $41
billion.
"(Monday's) events... diminished the political pressure Cardoso's
government has been feeling," said Eduardo Kugelmas, a political analyst at
Sao Paulo think tank CEDEC. "By widening the band, he responded to the
demands of several sectors that could have thwarted the fiscal adjustment
plan."
Congress late Wednesday approved three fiscal plan measures expected to
generate BRR1.9 billion this year.
The so-called provisional measures up for vote were announced by the
government two weeks ago to help compensate for BRR6.7 billion in lost
revenues owing to Congressional failure last year to approve a controversial
tax hike included in the fiscal plan.
While analysts had expected the measures to pass easily, they said the
turnout at the joint session of Congress would provide an indication of the
political impact created by Wednesday's events.
As voting got underway, 440 of the 513 members of the lower house and
55 of 81 senators were present, a solid turnout by all accounts.
Indications of support were also coming from the state level, where Cardoso
has felt a political pinch over the past week following the announcement by
the state of Minas Gerais - Brazil's third wealthiest - of a 90-day moratorium
on debt payments to the federal government.
Late Wednesday, Rio de Janeiro governor Anthony Garotinho, a Cardoso
foe who last week hinted he might jump on the moratorium bandwagon,
praised the move to effectively devalue the real, local Estado news agency
reported.
"The exchange policy needed to be more flexible because (the previous one)
was unrealistic and was hindering Brazilian exports," Garotinho said,
following a meeting with Finance Minister Pedro Malan to discuss the state's
financial problems.
Analysts said that the decision by Minas Gerais to suspend federal debt
payments was likely the nail in the coffin for Gustavo Franco and provided
the spark for the forex policy alteration.
The lame-duck central bank head had reportedly told Cardoso last week
that he wanted to step down from his top post at the Central Bank, but the
president convinced him to stay until March.
Political consultant de Goes said that Wednesday's events were precipitated
by Minas Gerais's announcement, which spurred an exodus of foreign
capital. On Tuesday alone, some $1.2 billion fled the country.
"More than just representing a new political reality, the new exchange band
was a response to capital flight," de Goes said.
Analysts said that the government was also responding to pressure from
Cardoso-allied state governors who, while pledging to not declare a
moratorium, had demanded that interest rates be cut.
"Many states expressed an apparent support for Cardoso, but they made it
clear they wanted something in return," said David Fleischer, a political
scientist at the University of Brasilia, who warned that the dispute with
recalcitrant governors is far from settled.
As for the political implications of the departure of Franco, who is widely
viewed as a chief architect of the inflation-taming Real Plan introduced in
1994, analysts said there was no cause for concern.
"Francisco Lopes is more pragmatic and flexible than Franco," Fleischer
said, praising the new Central Bank head's low-key demeanor as a valuable
asset during times of crisis.
Market analysts praised Lopes Wednesday as an administrator with solid
qualifications who has credibility both within Brazil and abroad.
-By Stephen Wisnefski; (55-11) 813-1988; swisnefski@ap. |
