WSJ story on Brazil's economy in general:
1998
Brazil's Recent Capital Flows
Reverse Last October's Flight
By MATT MOFFETT
Staff Reporter of THE WALL STREET JOURNAL
RIO DE JANEIRO -- What a difference a few months have made for Brazil's suddenly upbeat economic picture.
After a surge in capital flight in October threatened to wreck Brazil's hardwon economic stability, the Central Bank now finds itself awash in dollar inflows, with hard-currency reserves hovering around a historic record of approximately $63 billion.
"I don't know of anyone who isn't surprised with the speed of the recovery of reserves," says Roberto Padovani, an economist for Trend Consultoria Economica of Sao Paulo. Many analysts are estimating that this month Brazil should surpass the $5.7 billion net gain in reserves that it recorded in February. If it does, that could push reserves to near $65 billion by the end of March, or about $14 billion above their low point during the fall's speculative attack. "We have the feeling that the crisis has been overcome," said a confident Altamir Lopes, chief of the Central Bank's economic department.
Much of the capital inflow has come in the form of portfolio investment in the local money market, where Brazil's interest rates are among the most attractive in the world. But there also has been a steady flow of foreign direct investment, about $2.16 billion in the first two months of 1998, more than 50% above the level recorded during the corresponding period last year. Making this increase in investment in plant and equipment all the more impressive is that only a small portion of this year's inflow has been directed toward privatizations, the main magnet for foreign direct investment to date.
The rapid stabilization of the economy has been a big boost for President Fernando Henrique Cardoso's prospects of winning a second term in this fall's presidential election. He has staked his credibility on economic stability, and most polls show him in a commanding position, despite a surge in unemployment caused by government austerity measures.
Brazilian policy makers are taking bows for having responded to the October emergency, provoked by financial tumult in Asia, with a potent three-pronged counterattack: a massive increase in interest rates to 46% a year, a package of $18 billion in emergency budget cuts, and a new political push on long-stalled congressional reforms to trim the role of government. Brazilian officials deserve "very high marks for a powerful, forceful response" to the crisis, says Carl Ross, Latin American economist at Bankers Trust in New York. He adds that Brazil also "got lucky" with a positive change in the outlook for Asia. A key turning point for Brazil, Mr. Ross notes, was a decision in January by foreign banks to roll over South Korea's debt, a move that brightened the outlook for emerging markets around the world.
Mr. Ross says that while Brazil seems to have won a battle against international currency speculators, the war to ensure the country's economic stability isn't over yet. "The big question for Brazil in the next two years is whether it will be able to engineer a soft landing from the twin deficits in the current account and fiscal account, something precious few countries have been able to do," Mr. Ross says.
Even though the risk of an economic meltdown looks ever more distant for Brazil, this still isn't shaping up as a banner year for Latin America's largest economy. Interest rates, now set at 28%, are still high; bad debts and unemployment are rising; and there appears to be a long-term trend toward more moderate growth in sales of durable goods, such as large appliances. Mr. Padovani recently bumped up his forecast for economic growth this year, but only slightly, to 1.6% from 1.4%.
Still, Brazil, which not long ago was considered one of the bad boys of the international financial system, is now being lauded by the International Monetary Fund and other multilateral organizations for having managed a potentially disastrous external crisis in exemplary fashion. Especially significant, analysts say, have been the government's moves to bridle the dangerous growth of the deficit in the current account, the broadest measure of trade. Due largely to measures to slow the economy, the current-account deficit is on target to decline to about 3% of gross domestic product this year, from more than 4% of GDP in 1997, according to a report by J.P. Morgan. Even in the trade account, fortune has smiled upon Brazil this year. The sharp reduction in oil prices should reduce Brazil's oil imports by about $1 billion this year, according to government projections.
Looking ahead, the challenge will be to continue ratcheting down interest rates, and alleviating domestic economic pain in advance of October presidential elections, without rattling the confidence of foreign investors. Even though money is flowing back into Brazil, it could still be midyear before the country is able to push rates down to their precrisis levels of around 21%, says Andre Loes, an economist at Banco Bozano, Simonsen SA, a Rio de Janeiro investment bank.
"With the external balances following a favorable trend, the new focus is on the fiscal question at home," says Mr. Loes. Indeed, the one economic statistic that actually seems to be deteriorating is the government's fiscal deficit. Mr. Loes recently raised his deficit projection for 1998 to 5.7% of GDP from 5%. The main culprits: state governments, which are spending proceeds from privatizations with unhealthy haste.
A recently approved overhaul of the federal social security system should eventually reduce benefit payments by about 1% of GDP, but the full budgetary effect of the reform is still some years off. In the meantime, analysts say, the federal government will have to jawbone provincial administrations to put a lid on spending.
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