Thursday January 21 6:42 AM ET
Brazil Takes Breather After Key Fiscal Vote
By Mary Milliken
SAO PAULO (Reuters) - Brazil faced markets on firmer ground Thursday after the lower house of Congress overwhelming approved a key fiscal bill, sending a signal that it will fight to avert an economic meltdown.
Now past that hurdle, the world's eighth largest economy may enjoy some time away from the limelight after grabbing global investors' attention during a two-week battle with dollar flight and currency devaluation.
With the lower house's approval late Wednesday of a bill to boost pension contributions, President Fernando Henrique Cardoso keeps his fiscal austerity program on track and moves closer to meeting his obligations with the International Monetary Fund.
''This is a big victory for the cause of fiscal austerity and reforms in Brazil,'' said Arturo Porzecanski, ING Barings chief Americas economist. ''It's a very bullish sign for investors in emerging markets in general, not just in Brazil specifically.''
Investors were watching the vote as a test of the government's ability to address its alarming budget deficit, considered to be the root of Brazil's financial turmoil at just under 8 percent of gross domestic product.
The vote ''shows we are on the right path,'' Cardoso said in a late night speech. ''Foreigners ... are beginning to understand that Brazil is advancing as it should.''
Many deputies who previously voted against the four-time-rejected bill responded to the government's pleas in the name of saving Brazil from collapse. The final vote was 335 in favor, 147 against and four abstentions.
Opposition Congressman Delfim Netto said he changed his mind because Finance Minister Pedro Malan had been ''kidnapped by the IMF and Washington'' and the vote was ''the price of his ransom,'' the Folha de S. Paulo newspaper reported.
Brazil pledged to tackle its chronic overspending in the public sector with widespread reform in exchange for a $41.5 billion credit line led by the IMF and leading nations in November.
The generous civil service pension system, which pays top retirees up to $8,000 a month, has been one of the biggest drags on Brazil's budget deficit, with payments exceeding contributions sevenfold.
The bill voted on in Congress Wednesday would increase pension contributions from civil servants and, more controversially, make retired public-sector workers pay for their pensions.
The bill should sail through the pro-government Senate, but analysts are still concerned about a couple of vital tax hikes that must go through the unruly lower house for the package to be wrapped up in Congress.
''They could stub their toe on them and if that happens, there may be a reassessment,'' Charles Blitzer, chief economist for emerging markets at Donaldson, Lufkin & Jenrette, told Reuters Television.
For the next few days, at least, Wednesday's vote should buoy Brazil's currency, which was allowed to float freely against the U.S. dollar last week for the first time since its creation as the foundation of Cardoso's anti-inflation Real Plan.
The real slumped to 1.59 to the dollar Wednesday, bringing the currency's devaluation to 24 percent in one week amid concerns over further dollar flight.
Brazil's Central Bank was forced to allow the real to float last week after capital flight peaked anew when a leading state declared a moratorium on its federal debt.
Even after the Central Bank hiked a key interest rate to 41 percent on Monday to stem dollar outflows and avert knee-jerk inflation, more than $300 million has left Brazil every day.
''With fiscal reforms getting approved, we should see an impact in markets and in stocks and eventually we could see Brazilians bringing their capital back to Brazil,'' said Bob Gay, Latin America strategist at Bankers Trust in New York.
The Sao Paulo Stock Exchange has recovered 50 percent of its value in the past four sessions on optimism over the new currency regime and congressional votes.
While some analysts expected emerging markets to enjoy a respite from selling pressure, other market heavyweights were alerting investors to more troubles after Brazil's currency debacle.
''I'm very afraid it will claim other victims in Latin America,'' Barton Biggs, the chairman of U.S.-based Morgan Stanley Dean Witter Investments said. ''The most obvious one is Argentina.''
If Argentina abandoned its currency board system to protect its industry from Brazil's weaker real, Biggs predicted that speculators might be emboldened to attack other currencies, including the Hong Kong dollar and the Chinese yuan.
Earlier Stories
Brazil Government Buoyed By Key Policy Victory (January 21)
Brazil Government Wins Key Test In Congress (January 20)
Brazil Lower House Approves Crucial Pension Bill (January 20)
Brazil Gov't Clinches Important Win In Congress (January 20)
Brazil Faces Critical Test In Congress (January 20 |
