Latin American Govts Turning Fiscal,
Monetary Screws
By THOMAS CATAN and MARY MILLIKEN
Dow Jones Newswires
NEW YORK -- After making lofty promises of fiscal and monetary rectitude
to the International Monetary Fund last week, Latin American governments are
moving to back their words with deeds.
The Brazilian government Tuesday announced fiscal austerity measures,
including budget cuts of 4 billion reals or 4% of total expenditures, the creation
of a fiscal control commission, and an "immediate brake" on overspending.
Ecuador's new government promised to follow suit with measures to cut
spending and raise more tax revenue, but Finance Minister Fidel Jaramillo
declined to give further details on his plans. The full fiscal package is expected
to be announced sometime this month.
The Peruvian and Chilean central banks, meanwhile, late Monday altered
minimum reserve requirements in an effort to alleviate pressure on their
currencies and calm their foreign exchange markets.
And Venezuela before the weekend announced another $160 million in
spending reductions, bringing its total cuts this year to over $4.5 billion.
Despite their efforts, which followed a meeting late last week in Washington
between Latin American finance ministers, central bankers and the IMF,
analysts say the region's main economies have further to go.
Tuesday's measures by Brazil are "largely cosmetic," said Graham Stock, vice
president of Latin American research at Chase Securities, adding that Brazil
and Venezuela will have to announce further fiscal reforms after elections later
this year.
"Latin America is in an ongoing process of fiscal adjustment," Stock said, as
countries adapt to falling oil revenues, slower growth and tighter credit markets
abroad. "Certainly after the elections, we will have to see a concerted effort at
fiscal reform and a possible further tightening of monetary policy."
"The Brazilian measures are very limited in scope," said Javier Kulesz, an
emerging markets analyst at BankBoston. "What the government wants to do
is send the right signal to the markets, but this is not going to solve anything."
Others said that Brazilian President Fernando Henrique Cardoso, who's up for
reelection on Oct. 4, is doing the best he can.
"The market was wanting something unviable and what the government did
was make a viable proposal," said Dalton Gardiman, economist at Deutsche
Morgan Grenfell in Sao Paulo.
Gardiman predicts that the measures will be enough to offset the increase in
debt servicing costs due to the tightening in credit that goes into effect Tuesday.
"It's not going to improve the public deficit," Gardiman said. "But we can't
afford to put up with a larger public deficit because it's already too high."
Brazil's public deficit stands at 7% of gross domestic product. Also Tuesday,
the government vowed to draw up a three-year deficit reduction plan to send
to Congress by Nov. 15.
In terms of the 1999 budget, which was sent to Congress last week, the
government hasn't made any specific cutbacks. But it is empowered to limit
spending in the future to ensure a primary budgetary surplus of 8.7 billion reals
(BRL) ($1=BRL1.7) in 1999, up from a surplus of BRL5.0 billion for 1998.
The primary balance excludes debt servicing.
"We already thought the 1998 and 1999 budget forecasts were optimistic and
what the government did was guarantee them," said Jaime Alves Neto,
economist at Sao Paulo's Banco Patente. "If it manages to meet them, then it
will be an accomplishment."
Alves Neto believes the government doesn't have much credibility in cutting
expenditure, judging by the results of its November 1997 fiscal package,
implemented to stop a run on the currency. "The government only met
objectives on the revenue side," he said, in reference to the tax increases in the
November package.
On whether other measures can be expected this week, economists said the
behavior of capital outflows will be the deciding factor.
"We have to wait some days to see if the capital outflows lessen," said
Gardiman. "Measures are possible, but I don't know what they would be."
Alves Neto said that if the net outflow falls below around $300 million daily, no
more measures will be needed.
On Friday, Brazil's foreign exchange market showed a net dollar outflow
$2.93 billion, bringing the total net outflow in the first week of September to
$6.74 billion. Late Friday, the Central Bank announced a move to tighten
credit on the local market and stem the outflow of funds.
As of Tuesday and until the end of the month, the Central Bank has suspended
funding to banks at the basic rediscount rate, or TBC, of 19%. Banks will only
be able to tap Central Bank funds at 29.75%, the ceiling rate known as the
Tban.
Alves Neto predicts that the credit tightening will add BRL1.4 billion per
month to debt servicing costs, meaning that the BRL4-billion cut in the budget
only has a shelf life of three months.
The measures received an initial thumbs-down from the markets.
The Sao Paulo Stock Exchange's Bovespa Index turned negative right after
Finance Minister Pedro Malan unveiled the plans - dropping as much as 2.6%
- then recovered slightly on reported stock buying by government-backed
institutions. The Bovespa finished 0.3% lower.
Elsewhere in Latin America, the Peruvian Central Bank late Monday lowered
the average minimum reserve requirement on dollar-denominated deposits to
42.3% from 43.8% starting in October. The moved was believed to be aimed
at injecting dollars into the market and easing pressure on the sol.
The slight policy change bore fruit, with the sol ending Tuesday at around
3.050 per dollar from 3.068 a day earlier. The Lima Stock Exchange's general
index tacked on 0.4%.
The Chilean Central Bank was also busy late Monday, tightening up reserve
requirements for banks in an effort to avoid sudden spikes in interest rates.
Central Bank head Carlos Massad Tuesday criticized five unnamed banks
which he said had forced rates higher by managing their liquidity levels in "an
imprudent manner".
On an annual basis, Chile's interbank rate has risen to over 50% in recent
days. But the rate came crashing down to 18% from 53% on Monday, and the
Chilean peso weakened by 120 centavos to close at 473.60 pesos. Chile's
IPSA stock index shed 0.5%.
In Venezuela, which was under siege by speculators just a few weeks ago, the
bolivar finished slightly weaker at 586 bolivars to the dollar, while its general
stock index gained a healthy 3.0%.
Argentine government officials, meanwhile, repeatedly have ruled out the need
for special measures to deal with the market turmoil. They note that, due in
part to the Mexican peso crisis and a wave of acquisitions by foreign banks,
Argentina's banking system already has wrung out most of the weakest
players.
"We don't need to take any special measures, because we already have,"
Economy Minister Roque Fernandez said recently.
But Argentine markets suffered from disappointment over Brazil's actions, with
the Merval index dropping 2.9% Tuesday.
-By Thomas Catan; 201-938-2225; thomas.catan@cor.dowjones.com
and Mary Milliken; 5511-815-2271; mmilliken@ap.org
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