BusinessWeek. BRAZIL'S ILL WINDS
A recession could spread throughout
Latin America
Pedro Malan's image on the TV screen perfectly reflected the somber mood of a
country battered by global financial markets. Dark-suited and weary-looking,
Brazil's Finance Minister announced $10.8 billion in painful budget cuts on Sept.
8. Four days earlier, the Central Bank had raised interest rates by 10 points.
That's not exactly voter-friendly news with national elections looming on Oct. 4.
But the economy in Brazil is facing desperate times once again. And President
Fernando Henrique Cardoso had to do something substantial to stem the exodus
of money and convince investors he is committed to defending Brazil's currency,
the real.
As the region's biggest economy, Brazil is the Latin lightning rod for the financial
storm triggered by Russia's default and the bankruptcy of much of Asia. If fleeing
capital forces Cardoso to devalue the real, other Latin countries--starting with
Argentina--will come under intense pressure to follow suit. The result could be
economic turmoil throughout the region, wiping out much of the progress toward
economic stability achieved in recent years. Multinationals would reconsider their
ambitious investment plans for Latin America. And U.S. hopes of forging a
prosperous hemispheric free-trade partnership would dim, possibly for years to
come.
CATCH-22. Even if Cardoso manages to keep the real afloat, the cost will be a
sharp economic slowdown, very possibly a recession. Brazil's downturn would
stifle the economies of such trading partners as Argentina. That, in turn, could
transform the emerging-market crisis into a palpable drag on the U.S.
Brazil is already slowing. High interest costs, now 30% for the Central Bank's
key lending rate, and proposed deep cuts in government outlays are depressing
corporate investment and consumer spending. Marcelo Carvalho, economist for
J.P. Morgan & Co. in Sao Paulo, forecasts a 2% shrinkage of Brazil's gross
domestic product in 1999, down from previous projections of 2% growth. For all
of Latin America, Morgan is now predicting 0.8% next year, revised downward
from 3.4%
The catch-22 in Cardoso's game plan is the sharp increase in the cost of financing
Brazil's $260 billion domestic debt. Proposed spending cuts to rein in the
government's huge budget deficit, equal to 7% of GDP, are ''palliative steps that it
hopes will hold until the elections,'' says Carl Weaver, Sao Paulo-based head of
Brazil research for Banque Paribas. ''But it's not clear whether it will be enough.''
Growing worries over Brazil's shaky finances have sent capital fleeing, cutting
Brazil's currency reserves to an estimated $59 billion in early September, from a
peak of $75 billion last April.
What's clear is that Brazilian business is already headed for the bunkers. Auto
makers, a key sector, have already toughened credit terms. General Motors
Corp.'s Brazil unit, which exports 20% of its output, has cut back production
because of reduced demand in such markets as Venezuela and Russia. Brazil
Realty, a real estate developer partly owned by U.S. financier George Soros, has
postponed construction of four apartment projects, fearing that higher interest
rates will hurt demand. The harsher economy will eliminate scores of companies,
from steelmakers to electronics stores. ''Only the best will stay around,'' says
Zeke Wimert, chairman of the American Chamber of Commerce in Sao Paulo.
The impact of Brazil's slowdown is already spreading. In Argentina, which sends
30% of its exports to Brazil, forecasts of 6.5% GDP growth this year and 5% in
1999 have been cut to 4.5% and 3.7%. Fiat's Argentine unit, which has 200,000
cars sitting in Brazilian ports, will halt production for seven days this month as
Brazilian demand dries up.
Now, looming beyond Brazil's slowdown, is the specter of deflation in a country
notorious, not long ago, for hyperinflation. Supermarket prices dropped a
head-turning 1.4% in just the last week of August. Overall, consumer prices fell
1% for the month, the lowest in the 45 years in which records have been kept.
Price deflation and rising financing costs could quickly lead to layoffs and more
economic strife.
Until recently, a major strength of Brazil has been its attraction for foreign direct
investment. But economists are already predicting that this year's $20 billion
inflow will not be matched in 1999, despite recent commitments by companies
such as Dell Computer Corp. and Caterpillar Inc. to expand in Brazil.
Can Brazil right itself and save the other dominoes? Cardoso will have to
persuade a reluctant Brazilian Congress to accept his cuts and enact reforms of
Brazil's bloated public payrolls, social security system, and inefficient tax
structure. And for that, he'll need a strong popular mandate in October.
Unfortunately, high interest rates and increased unemployment have never been a
great recipe for political popularity.
By Ian Katz in Sao Paulo
RELATED ITEMS
CHART: Brazil's Shrinking Reserves
FEELING THE SQUEEZE IN MEXICO
CHART: Mexico's Sinking Peso
Press
for more information from Business Week's Archive*.
*There's no charge to see this list of stories. A small payment is
required only if you decide to view any specific article.
Updated Sept. 10, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use
|
