Brazil Beats IMF Fiscal Targets;
Market Awaits New Aid Package
A WALL STREET JOURNAL ONLINE News Roundup
Despite rising interest rates, a weakening real, energy rationing and a slowing economy, Brazil continues to surpass fiscal targets set by the International Monetary Fund.
Brazil posted a bigger-than-expected consolidated public-sector primary budget surplus of 30.42 billion reals ($12.47 billion) in the first half of the year, corresponding to 5.22% of gross domestic product. The IMF target is 3% of GDP.
The strong budget numbers should help Brazil rally international support, including further IMF aid, as it fights to stave off fears created by neighboring Argentina's economic woes. Now the market is no longer wondering if, but rather when Brazil will renew its aid program with the IMF, which expires Dec. 1.
For the month of June, Brazil posted a primary budget surplus, which excludes debt servicing costs, of 3.45 billion reals. While it was down from the 3.71 billion reals in May, it was higher than economists' expectations. With the June result, Brazil also beat its IMF target for September of $29.67 billion, three months ahead of time -- although third-quarter budget numbers will have to come in before the victory is confirmed.
Brazil's nominal budget balance, which includes debt servicing, also brought positive surprises in June as the depreciation of the real apparently bolstered the financial results of key state companies like oil giant Petrobras. The nominal budget posted a surplus in June of 461 million reals compared with a nominal deficit of 12 billion reals in May. The nominal budget gap shrank to 5.37% of gross domestic product in the 12 months to June from 5.65% of GDP in the 12 months to May. The total public sector debt as a ratio to GDP fell to 51.3% in June from 51.8% in May.
Brazil has borne the brunt of spillover from Argentina, which is struggling to service $128 billion in public debt in the midst of a three-year recession. The Brazilian real has weakened around 20% against the dollar and the central bank has hiked its reference lending rate by 3.75 percentage points to 19% since March.
Brazilian monetary and financial authorities, who last week spent several days in Washington meeting with the IMF and U.S. Treasury officials, have hardly tried to play down speculation of a future package for extra protection from Argentina's ills.
Pedro Parente, chief of staff for President Fernando Henrique Cardoso, said Friday that IMF officials are "for sure" receptive to the idea of renewing an agreement. At the same time, Finance Minister Pedro Malan said if Brazil does sign a new agreement it wouldn't last beyond the end of 2002, when presidential elections will usher in a new administration.
IMF spokesman Thomas Dawson last week tried to downplay the speculation, saying meetings last week focused on the performance of the current program. But he also didn't rule out the possibility of discussions turning toward the establishment of a new accord.
After Mr. Dawson's comments, Merrill Lynch said in a report late Friday, "we expect that market expectations should now take a more sober view of the timing for an announcement. We nevertheless believe that the IMF statement is still absolutely compatible with the scenario of an extension of the current IMF program."
In late 1998, the IMF led a $41.5 billion package for Brazil. Its contribution amounted to an $18.1 billion "standby" credit arrangement.
Analysts believe an accord on a new package will be announced in the weeks ahead. But there is little consensus about the size, type or duration of a new package -- with the numbers now being kicked around in the market range from $10 billion to $20 billion.
Yianos Kontopoulos, Merrill's local currency strategist, wrote that "the most interesting option" for Brazil and the IMF is a new standby agreement in place by September. That would mean the early termination of the current package, "thus allowing for an earlier release of funds."
Doug Smith, head of Latin American economic research at IDEAglobal, thinks $10 billion would be the most Brazil could get from the IMF, given the limited time frame mentioned by Mr. Malan.
Mr. Smith noted that Brazil's current $18.1 billion package from the IMF was for three years, making for a little over $6 billion a year. He added that IMF programs usually last for three years, not one, though there are exceptions.
Other analysts say a new agreement could come with extension clauses.
Still, Brazil's balance of payments, while not sterling, isn't that bad, Mr. Smith pointed out.
Brazil's first-half current account deficit amounted to 5.1% of gross domestic product. But it posted an $18.27 billion surplus in its capital account, and foreign trade was nearly in balance with a $70 million deficit.
"Brazil would only need the money if Argentina defaulted, devalued or both," Mr. Smith said.
Mr. Smith reckoned Brazil would end up with a two-part package from the IMF, each worth $5 billion or less. One part would be a standby facility, which requires periodic performance reviews before funds are released.
The other part would be a "Supplemental Reserve Facility," for fast release of funds in case Argentina implodes.
The SRF was established in late 1997 "to provide financial assistance to members experiencing exceptional balance of payments difficulties due to short-term financing needs resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the members' reserves," according to the IMF.
Jose Barrionuevo, global head of strategy at BNP Paribas, said Brazilian monetary and financial authorities would want another package "to send a signal of providing for an even stronger fiscal anchor, a key point of differentiation between the two countries."
Such insurance against any fallout from Argentina would also make the Brazilian central bank's "superbly designed" monetary policy more effective, he added.
But Argentina is only part of the reason the market wants to see another IMF package, said Fleet Global Markets in a Friday report. "The other part is that an IMF program will constrain the new government in the case it has fiscally irresponsible leanings," it wrote, referring to next year's elections.
"Moreover, an IMF program can be useful to very fiscally responsible governments because it gives them a crutch when they have to explain politically difficult austerity measures," Fleet said.
Brazilians will elect a new president in October 2002. Market-friendly Mr. Cardoso is prevented by law from running for a third consecutive term. |
