I.D.E.A. Global Focus Feb 22 1999 12:05PM CSTArchives...
Brazil update -- Rate cut greets congress' return Brazilian lawmakers returned from holiday Monday to be greeted by lower interest rates. It's good news at the start of what looks a tricky week for Brazilian markets.
The Brazilian central bank lowered the benchmark Selic interest rate 20 basis points to 38.80% Monday in the hope of easing the government's debt obligations and encouraging lending.
The real's recent stability prompted the government to ease the rate. In the past two weeks, the currency has stayed around 1.90 to the dollar.
Brazil had to hike interest rates 10 percentage points to 39% as the real plummeted after the government scrapped its currency band. The central bank hoped high returns would lure investors to hold the currency.
But high lending rates are strangling the economy and raising concern that the government won't be able to afford to make its debt payments. Approaching two-thirds of the state's debt is linked to the Selic rate.
The real has remained stable since the cut. At 15:35 GMT, dollar/real had inched up to 1.94 from 1.91.
Tuesday, Brazilian lawmakers will start rolling up their sleeves, ready for a tough session ahead. Congress' holiday has coincided with period of calm for markets. Now, much will depend on whether it approves the government's economic reforms.
Near the top of the agenda is passing the nomination of Arminio Fraga as Brazil's new central bank president. And while the choice of Fraga was welcomed with wild excitement by the markets it is unlikely to receive the same reception in congress.
Fraga comes fresh off a job with financier George Soros and his close association with Wall Street has some lawmakers sceptical that his loyalties may lie outside Brazil.
Thursday, lawmakers will start what should be a lively debate on Fraga's appointment. While it should be passed, delays will make markets nervous.
Congress will also have a welter of new economic reforms to approve. President Fernando Cardoso says that to meet new IMF-set fiscal targets, the government must slash spending by at least R4bn ($2.05bn). Details of the new measures should be made public on Tuesday or Thursday.
Proposed spending cuts will not be met by a smiling congress. Brazil has fallen into a recession for the first time in six years, a report showed Friday. Economic growth slid 1.6% in the fourth quarter of 1998, the second consecutive quarterly contraction.
With unemployment growing and inflation on the rise, lawmakers aren't going to want to pass another round of stringent fiscal reforms. Unfortunately, that's exactly what the IMF and financial markets demand.
Only one measure from Cardoso's original economic reform package remains to be approved, but on it rests the next $9bn tranche of the IMF-led loan package. The senate will vote on the financial transactions tax, known as the CMPF, March 10. A second round vote should follow on March 24.
Pressure is on the senate. Failure to approve the bill, already passed by the lower house, would threaten future support from the IMF and send markets into a spin.
Nor do the government's problems end at the walls of the parliamentary building in Brasilia. Opposition-state governors will meet with president Fernando Cardoso Friday to try to hammer out a deal about their debt payments to the federal government. The cash-strapped governors say they can't afford to make payments.
Cardoso says he has ruled out renegotiating the debt, saying it would cost the government a total of R29.43bn ($15.09bn).
If the week runs with few snags, the Bovespa should inch up to 9,100 from 9,041 while the real should continue hovering around 1.94 to the dollar. Bad news, however, could push the Bovespa down to 8,650 and the real to 2.01 to the dollar.
I.D.E.A. : Mon Feb 22 17:51:03 1999 [GMT]
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