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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: Steve Fancy who wrote (6356)	8/5/1998 10:41:00 PM
From: Steve Fancy	Read Replies (1) \| Respond to of 22640

ANALYSIS-Brazil's deficit seen haunting next gov't Reuters, Wednesday, August 05, 1998 at 20:14 By Shasta Darlington SAO PAULO, Aug 5 (Reuters) - Brazil caught economists off guard Monday when it changed the way it reports the country's budget deficit, but more unsettling is what lurks behind the figures, economists said. "Brazil tried to make the numbers look a little better, but that doesn't change a situation that nobody really sees improving before (October 4 presidential) elections," said Joyce Chang, director of emerging markets fixed-income research for Merrill Lynch. Brazil's central bank said Monday that it posted a nominal budget deficit, which takes debt costs into account, equivalent to 6.52 percent of gross domestic product (GDP) in the January-May period. "The public is left with the impression that the government is trying to hide negative information about the public accounts with the next elections in view," daily O Estado de Sao Paulo wrote in its editorial on Wednesday. The figures briefly confused analysts who had grown accustomed to Brazil reporting the budget deficit over 12 months through the latest month being reported. Since December 1996, the Central Bank has measured the public sector budget deficit over 12 months, with the shortfall in the 12 months to April reaching 6.72 percent of GDP. The deficit is currently the most closely watched of all Brazilian economic indicators. Economists consider it the Achilles heel of the country's four-year-old anti-inflation plan because it makes the real currency vulnerable to speculative attack. One day after the official announcement the Central Bank said that May's year-on-year nominal budget deficit had been of 7.02 percent, economists said. Brazil hasn't seen a deficit that big since 1995, and then it was mostly a reflection of soaring inflation that the government was struggling to bring under control. Economists blame the Cardoso administration's failure to cut expenditures and reign in spendthrift state and municipal governments during an election year combined to worsen the deficit. These also promise to be the biggest headaches for the administration that steps in after the October election -- which polls show will be won by President Fernando Henrique Cardoso. The majority of congressional seats and all state governorships and municipal posts will be on the ballot. The federal government has been reluctant to reign in spending during an election year. "There's a lot left to be done, but they're going to write it off until next term," Merrill Lynch's Chang said. "There will have to be a change, a stronger commitment to fiscal improvement after then," said Carlos Kawall, chief economist at Citibank's Brazil operations. "There's a whole package of $20 billion in cuts but they couldn't put into effect the expenditure cuts in an election year," Chang said. There are some almost immediate measures the post-election government is expected to take, economists said. One is job cuts. Cardoso never enforced many of the personnel spending cuts that were approved by Congress at the end of last year as an emergency response to the crisis in Asia. Many of the 33,000 announced civil servant layoffs were never carried out. The government also failed to implement budget cuts in education and health earlier this year. Under the end-1997 austerity plan, spending cuts were expected to save the government 5.3 billion reais while a reduction in state loans was expected to cut costs 3 billion reais. But they didn't materialize. Another one of the 50 planned austerity measures announced -- of 5 percentage point increase of the vehicle production tax -- was repealed just this week by the government. Economists said they didn't see the new government implementing a new package of reforms in the short-term, though the administration could try to enforce some of the cuts already approved and focus on other isolated items. "Cardoso tends to seek a consensus and that limits his ability to reign in spending," Chang said. Public servants' salaries could be cut further by consolidating ministries and other positions which would allow the government to reduce the income of workers considered "redundant," Citibank's Kawall said. However, there are some developments before October which could curb the deficit, economists said. A further reduction in interest rates and the extension of the growing stock of short-term domestic debt is expected to begin before elections and pick up speed after October. Interest rates have slowly come down from a peak of 43 percent last November when the Central Bank almost doubled rates to protect the nation's currency from a speculative attack amid the Asia crisis. Even if rates don't fall any lower than today's 19.75 percent, the government can expect to save the equivalent of 1.0 percent of GDP in interest payments, Kawall said. Inflow from Brazil's massive privatization program has helped to write off some of the debt. After the election, the government is going to have to step up efforts to extend the maturities and bring interest payments down, Chang said. Following the swearing-in of the new Congress in February, the government can jump-start the long-stalled effort to reform social security. That would help cut a deficit in the pension system that by the end of 1998 is expected to reach $7.2 billion. shasta.darlington@reuters.com)) Copyright 1998, Reuters News Service