ANALYSIS-No quick fix seen for Brazil fiscal woes
Reuters, Friday, September 04, 1998 at 17:21
By Joelle Diderich
BRASILIA, Sept 4 (Reuters) - Pressure is growing on Brazil
to tackle its rampant fiscal deficit, amid global jitters in
emerging markets, but the government has few quick-fix
solutions to pull out of its hat, economists said Friday.
Calls for Brazil to attack its fiscal gap, estimated at an
annual 7 percent of gross domestic product (GDP), intensified
after Moody's Investor Service downgraded Thursday its ceiling
for Brazilian foreign currency bonds, notes and bank deposits.
Foreign investors rattled by the crisis in Russia are
increasingly worried about the sustainability of Brazil's
economic policy mix, which combines the gaping fiscal deficit
with a strong currency, growing debt and falling rates.
They are also keeping a close eye on foreign currency
reserves, considered Brazil's main weapon to fend off a
speculative attack on its domestic currency, the real.
The Central Bank has so far resisted the temptation to
raise interest rates, a measure that would draw foreign capital
but also inflate the level of debt.
President Fernando Henrique Cardoso, facing elections on
October 4, has little room to maneuver and has pledged instead
to continue plugging away at reforms which have been dragging
through Congress for more than three years.
"There is no rapid solution for the fiscal deficit," said
Jose Carlos de Faria, economist at ING Bank in Sao Paulo.
Rather, the government has a number of quick solutions on
tap, but all of them carry such heavy political and economic
costs as to make them inviable, analysts said.
Three sectors account for the brunt of Brazil's fiscal
troubles: spending on social programs and infrastructure,
social security and interest rate payments on debt.
Officials forecast the social security shortfall will be
equivalent to 2.67 percent of GDP in 1998.
One option would be to raise taxes, as Brazil did at the
height of last year's Asian economic crisis, when it announced
a $20-billion package of tax increases and spending cuts.
Although this would provide a rapid cash injection for
government accounts, Brazil's tax burden is already high at 30
percent of GDP and any further increase could put off foreign
companies thinking of investing here, economists said.
Cardoso has excluded a repeat of last year's fiscal
austerity package which, although praised by foreign
governments and international investors, exacted a heavy price
on ordinary Brazilians through slower growth and rising
unemployment.
A more commonly suggested solution is for the government to
sharply cut spending on social programs and infrastructure,
which has been the fastest-growing item in National Treasury
accounts this year, excluding debt servicing costs.
"As a result of last year's package, rates rose, taxes
rose, but the spending (cuts) part was never completed," said
Jose Luciano Dias, political analyst at Goes e Consultores. "A
possible measure would be just to fulfill the second part of
the package."
However, the political drawbacks of such a move could be
severe. By cracking down on populist spending measures, the
government would risk losing support in the fractious Congress,
making it even harder for it to push through reforms, Dias
noted.
"The government has maintained its support base in Congress
precisely through its weak fiscal policy," he said. "It would
be embarking on a policy that, on top of having uncertain
economic results, could carry a heavy political cost."
Meanwhile, the Central Bank has its hands tied on interest
rates, despite moves this week to make monetary policy more
flexible in the face of external shocks.
Cutting the prime lending rate from the current annualized
19 percent is seen as impossible at a time when dollar outflows
are peaking, as nervous investors dump local shares to cover
losses in Russia and invest in safe-haven U.S. Treasuries.
Raising rates would have disastrous consequences for the
fiscal gap by inflating the government's debt servicing costs,
which have soared since it doubled rates last October to
contain the fallout from the Asian crisis.
As a result, the most foreign investors can expect for now
is for Cardoso to finalize ongoing reforms of the social
security system and civil service and to embark on a promised
reform of the tax system, economists said.
The problem is that the effects of these measures may not
show in the fiscal deficit data for quite some time, they
noted.
joelle.diderich@reuters.com))
Copyright 1998, Reuters News Service |
