ANALYSIS-What next after Brazil devaluation?
Reuters, Thursday, January 14, 1999 at 19:28
SAO PAULO, Jan 14 (Reuters) - Brazil's devaluation
Wednesday of its real currency has prompted financial analysts
to raise questions and review their outlook for the country's
economy and political situation.
Below are some of the possible consequences for Brazil in
the wake of its 8 percent devaluation, as gauged by analysts
from major financial institutions.
THE FOREIGN EXCHANGE OUTLOOK?
Analysts say Wednesday's widening of the exchange rate band
should be regarded as an attempt to let off steam after hefty
dollar outflows in previous weeks put pressure on the real. By
Thursday, hopes grew that dollar flight would not soar out of
control.
The likely scenarios for what comes next vary: Brazil pulls
it off and the devaluation is sufficient to calm concerns over
the perception that the the real is still overvalued or, on the
contrary, does it does it fail to reassure investors, spurring
massive losses of foreign reserves resulting in a
maxi-devaluation?
As an alternative to the band system of fixing the foreign
exchange rate, the Central Bank may decide to let the currency
float or it could widen the band even further (effectively a
larger devaluation). Salomon Smith Barney said in a report the
government could even consider a dual exchange rate system,
where the forex market would be divided into commercial and
floating rate segments, with the commercial market banded.
WILL SKY-HIGH BRAZILIAN INTEREST RATES ACTUALLY TUMBLE?
That was one of the aims of the devaluation. But Finance
Minister Pedro Malan told Reuters Wednesday rates might have to
rise in the immediate aftermath in order to win the confidence
of the markets and ensure some stability in the weeks to come.
The overnight interbank annual interest rate is currently about
30 percent, a steep figure for a country in which consumer
prices actually fell 1.79 percent in 1998 in the greater Sao
Paulo area, the country's economic powerhouse.
FISCAL CONSEQUENCES?
One of the aims of the devaluation was to bring sky-high
interest rates down. That will help the budget deficit of the
public sector (now at around 8 percent of gross domestic
product) by lowering domestic debt-servicing costs.
On the other side of the coin, some 55 billion reais of
Brazil's roughly 310 billion reais in internal debt is
dollar-linked and a devaluation makes that more expensive in
local terms.
Tax revenues may also be lower than expected if Brazil
plunges into a recession this year, putting pressure on the
deficit although the government has said it will cut spending
to match any slowdown in income.
Brazil agreed with the IMF to limit its budget deficit to
42.6 billion reais in 1999, down from a target of 72.9 billion
reais in 1998, and must show it is on course to meet that goal
to fully qualify for $41.5 billion in international loans.
PRESSURE EASES ON CURRENT ACCOUNT GAP?
Brazil's current account balance of payments deficit, now
about 4.4 percent of GDP, is another worry for investors. It
was already expected to improve in 1999 amid lower demand for
imports and the devaluation could aid that by boosting exports
and making imports more expensive, analysts say.
BRAZIL COMMODITIES FLOOD ONTO MARKETS?
Cheaper prices for Brazil's key agricultural exports like
coffee and soybeans could swell supplies on world markets,
causing a nose-dive in prices. Brazil is the world's top
producer and exporter of coffee, the second largest producer of
soybeans, and chief exporter of sugar on the planet.
With more than 160 million mouths to feed, Brazil is also
one of the world's top commodity importers. But analysts say a
prolonged economic crisis could force buyers to trim imports of
rice, wheat and other crops from neighboring Argentina, Uruguay
and even the United States.
A CREDIT SQUEEZE FOR COMPANIES?
Brazilian export companies, such as steelmakers, could see
a boost in revenue as the relative lower cost of manufacturing
enables them to cut prices and bolster their sales abroad.
But many Brazilian firms, which have already seen the value
of their dollar debt jump overnight in relation to real-based
revenues, will face problems renewing their foreign loans and
issuing new debt as skittish investors withhold credit.
At home, companies will also feel the squeeze, caused by
steep interest rates and investors pulling out of equities,
further limiting financing options. An economic recession is
also expected to cut sharply into domestic sales.
WILL BRAZIL'S EXPECTED RECESSION GET WORSE?
Since Brazil will likely follow tight fiscal and monetary
policies after the devaluation, economists argue that Brazil's
expected 3 percent contraction next year may widen to about 5
percent. Exports will catch a second wind, however, as the
devaluation helps Brazilian companies cut prices and gain a
competitive edge.
IS THE GOVERNMENT WEAKER AFTER THE DEVALUATION?
President Fernando Henrique Cardoso owes his two election
victories to keeping the real currency stable for five years, a
policy which dragged Brazil out of hyperinflation and stablized
prices to the benefit of consumers. Should the currency fold,
his credibility would tumble too. But the government insists it
can turn market sentiment around by making urgently needed
progress on fiscal reform in Congress. Traditionally Brazil's
parliament rallies behind the government in a crisis. Key votes
loom this month and victories might help restore faith in
Cardoso's strategy for fighting the current crisis.
brasilia.newsroom@reuters.com))
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Copyright 1999, Reuters News Service
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