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

To: Steve Fancy who wrote (7920)	9/11/1998 6:14:00 PM
From: djane	Read Replies (3) \| Respond to of 22640

Continuing bearish view from TSC -- Latin Loot: Brazil Rebounds, but Devaluation Still Looms By Peter Eavis Senior Writer 9/11/98 6:08 PM ET The Brazilian government, with its back against the wall, Thursday night hoisted interest rates to nearly 50%, gaining itself a breathing space in its furious battle to avoid a forced devaluation of the real. Brazilian equity and bond markets soared in response to that move and to reports that the International Monetary Fund is willing to provide Brazil and other Latin American nations with aid to protect currencies. The Bovespa soared 13.4% after diving nearly 16% Thursday. Brazil's dollar bonds also rebounded, with the widely followed C bond climbing 2 1/8 to 55 3/4 per $100 of principal amount. But the country's dollar-pegged exchange rate is still in danger, as the fundamental problems with Brazil's economy -- particularly its huge fiscal deficit -- are getting worse. As a result, some pundits believe that President Fernando Henrique Cardoso and his economic team should steal a lead on the market and carry out a managed devaluation while Brazil still has enough reserves left to defend a new, lower exchange rate. In such an action, Brazil would probably dismantle its current dollar-pegged exchange rate and adopt a free-floating arrangement. In a research note published Friday, Jim Barrineau, Salomon Smith Barney's Latin America strategist, says that a "best-case scenario" for Brazil would be a move to a free-floating exchange rate after the Oct. 4 elections. Such a move would have to be done "with sufficient reserves on hand to smooth volatility and discourage excessive speculation." A credible set of large budget cuts would have to accompany a devaluation for it to work, says Barrineau. "I agree with this recommendation," says a Brazil-based economist at a large Western bank, commenting on condition of anonymity. "It's better that they devalue now when they have $52 billion in reserves than later." Some $22 billion of reserves have left the country since the beginning of August. It's hard to see what options other than devaluation the Brazilians have at this point. If interest rates stay at 50% for the next three months, the extra interest costs on the government's debt would increase the fiscal deficit to 9.5% of GDP by the end of this year from 7.2% now, estimates Jose Carlos de Faria, economist at ING Barings. While it's unlikely that interest rates will stay at 50% for that length of time, a fiscal deficit above 8% of GDP would be enough in itself to cause investors to flee Brazil. Those opposed to devaluation argue that it will solve nothing. The country, they say, needs to sweat this crisis out with high rates. And the government, which polls say will be re-elected Oct. 4, should immediately publish details of the big budget cuts it will enact in a potential second term. News of these will pump confidence back into the market and rates will tumble. The problem is that Brazil has to find $50 billion next year to cover an estimated current account deficit of $20 billion along with $30 billion in public and private sector debt amortization, according to the economist who requested anonymity. It can't reduce the amortization, so it should devalue to boost its trade performance and reduce the size of the current account deficit, he says. Antidevaluationists say the slower growth caused by higher rates will be enough to reduce the current account deficit. But Brazil's trade performance, even with the economy currently growing at a snail's pace, has been wholly uninspiring. Brazil can this year expect a current account deficit of $30 billion, or 3.6% of GDP, with economic growth of just 1.5%, says Goldman Sachs The big question is the extent of reserves needed by Brazil to execute a controlled devaluation. A Merrill Lynch research note today says the Brazilian authorities would not allow reserves to fall much below $40 billion before "considering more dramatic measures." That's only $12 billion away. A devaluation could then be in the cards.