Wall St. sees high chance of floating Brazil real
Reuters, Thursday, January 14, 1999 at 15:30
By Apu Sikri
NEW YORK, Jan 14 (Reuters) - Brazil could be forced to
abandon its foreign exchange policy and let the real float if
dollar outflows from the country remain at current high levels,
according to Wall Street economists and investors.
"We believe that the real could be floating by the end of
this week," said Jaime Valdivia, senior Latin American debt
strategist at Morgan Stanley Dean Witter.
About $1.1 billion in dollars flowed out of Brazil on
Wednesday. Corporations and investors put in another $2 billion
in claims against the central bank, dealers said.
"Chances are high that Brazil will go to another
devaluation or float within a week. The odds are very high
because they can't hold the real at current levels given high
interest rates," said Richard Medley, president of Medley
Global Advisors, a consultancy group.
"There's a 75 percent chance that there will be another
devaluation and it will be sooner rather than later," said Carl
Ross, head of Latin American research at Bear Stearns & Co.
Brazil's foreign exchange policy options will likely be
discussed by the finance ministers of the seven rich industrial
nations when they meet in Frankfurt this weekend for the
Asian-European conference, analysts said.
The U.S. and other countries doled out additional money to
turn an International Monetary Fund loan package into a giant
$41.5 billion rescue plan.
"I don't think Brazilian authorities have the luxury of
much time, they cannot allow reserves to decline to $20
billion," said Thomas Trebat, managing director for emerging
markets research at Salomon Smith Barney, a unit of Citigroup.
"They need to preserve their ability to pay on foreign
debt," he said. Brazilian international reserves currently
stand at $30 billion. Brazilian corporations alone have about
$5.4 billion in Eurobonds coming due this year, and another $20
billion short-term trade credits, according to figures compiled
by Chase Securities Inc.
"They will have to consider another move depending on the
amount of outflow they see over the next couple of days,"
Trebat said.
Another devaluation would not necessarily be a negative,
Chase economists said in a research note. "A combination of
more credible Brazilian fiscal restraint and currency
adjustment in inflation-adjusted (real) terms could limit the
depth of the Brazilian recession," they said.
A second devaluation would bring the real in line with the
market view that the Brazilian currency is over-valued by 25
percent. Brazil devalued the real by 8.2 percent against the
dollar on Wednesday.
But many analysts contend Brazil should float the real and
let it find its market equilibrium.
"We would rather have Brazil float the currency and find a
market-clearing level. That may accelerate (fiscal) reforms
while preserving reserves," said Morgan Stanley's Valdivia.
That would prompt "an Asia, Mexico style overshooting
before you retrace to some new level," said Michael Rosborough,
portfolio manager at the Pacific Investment Management Co.
Mexico devalued the currency by 15 percent in 1995, only to
let the currency float a few days later.
A devaluation may become a necessity as the alternative -
keeping high interest rates - will push Brazil into a deeper
hole on the fiscal front. The government currently pays
interest on about $300 billion in domestic debt. About 70
percent of it is linked to overnight rates - hovering around 30
percent.
Copyright 1999, Reuters News Service
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