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

To: Charlie Schultz who wrote (7092)	8/25/1998 9:03:00 AM
From: DMaA	Respond to of 22640

Their curency is stronger. They don't have the legacy of 80 years of communism.

To: Charlie Schultz who wrote (7092)	8/25/1998 10:04:00 AM
From: djane	Respond to of 22640

WSJ Editorial. Brazil Isn't Russia August 25, 1998 The devalued Russian ruble has renewed speculation that the emerging market "contagion" will continue to spread, with Latin America its next victim. In particular Venezuela and Brazil are said to be in the speculators' cross hairs, with some currency soothsayers gleefully forecasting a Latin American meltdown. It is true that international investors are nervous. Big banks facing a possible haircut on their Russian paper are understandably going through their portfolios looking for the next domino. Venezuelan bonds logically came under heavy attack late last week. But it's important to make distinctions. As Alejandro Sucre detailed in our Americas column two weeks ago, Venezuela has had two International Monetary Fund rescue packages but no serious economic reform. The government has twice failed to privatize its aluminum companies. Oil revenues provide enough cash flow to support bad policies but are fast declining. President Rafael Caldera has pledged to defend the bolivar, but the markets are measuring what he has failed to do as a reformer, not what he says as a lame duck president. Now Venezuela finds itself in the midst of a presidential campaign where the leading candidate is a left-wing former lieutenant colonel who led an attempted coup in 1992 and whose own answer to the country's economic crisis is a debt moratorium. Fortunately Brazil, the biggest Latin domino, has demonstrated the political will to maintain currency stability for some four years now; predictably, spreads on Brazilian bonds are about half that of Venezuelan paper. Certainly Brazil needs greater urgency about reform, but it has slowly begun to open its markets and dislodge the government from the middle of every economic transaction. More than a year ago, the large and profitable state mining company CVRD was privatized, and only last month telecom giant Telebras followed suit. Earlier this month, President Fernando Henrique Cardoso introduced an important labor reform that will provide greater flexibility for employers and there has been significant progress on financial sector reform. In other words, though Brazil's pace may be slow and grinding it is at least in the right direction. Mr. Cardoso is favored to win re-election because Brazilians like price stability and reform. Memories of indexed hyperinflation and the more recent Asian catastrophe have shown Brazilians all they need to know about devaluation as a boost for "competitiveness." As Finance Minister Pedro Malan told us earlier this year, the years of indexed hyperinflation have left every Brazilian business with the capability of adjusting prices for a devaluation almost instantaneously. Thus the country would not even get the short-term boost that devaluationists always envision. There is no reason for Brazil to find itself in the weak and defenseless position of having "no choice," as is often the excuse when a currency is finally abandoned. It can act again to send the market confidence-building signals, as it has since the start of the Real Plan, the 1994 program that dramatically curbed inflation by creating a new currency linked to the dollar, though sliding on a tightly controlled path. Last October, when the world's big thinkers were writing the epitaph for the Real Plan, Mr. Malan was digging in his heels. The central bank drained liquidity from the system. An interest-rate spike slowed the economy, but protected the purchasing power of the widely impoverished Brazilian population. The country's $67 billion in gold and foreign currency reserves is a good cushion, but it will be meaningless in a serious attack. If there is reduced demand for reals, the Brazilian Central Bank should, once again, reduce supply. Longer term, Brazil should institutionalize its currency stability by creating an automatic mechanism to drain reals from the system when the currency is under threat. This would remove discretion from the monetary policy and make the real less attractive as a target for speculators. A re-elected Cardoso also will have to get tough on the fiscal side, something he has dithered with for too long. All this is doable. A government willing to follow the right policies need not be a victim of "contagion." Brazil is not Russia; nor is it Venezuela. All it has to do is remember as much. Return to top of page \| Format for printing Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.