Brazil's 'dynamic duo' to remain at helm of economy
Reuters, Thursday, October 01, 1998 at 12:59
By Joelle Diderich
BRASILIA, Oct 1 (Reuters) - If Brazilian President Fernando
Henrique Cardoso has anyone to thank for safely steering his
economy through the worst of times, it is Finance Minister
Pedro Malan and Central Bank chief Gustavo Franco.
After Cardoso, Malan and Franco are the two men most
closely associated with Brazil's Real Plan, which relies
heavily on foreign dollar inflows to support a strong currency
and keep inflation at bay.
While the plan turned Brazil into one of the world's
hottest emerging markets, its dependency on foreign capital
often puts it in deep water -- such as when international
capital markets dried up during the Mexican peso crisis in
1995, the Asian currency devaluations of 1997 and the current
global market rout.
MALAN, FRANCO TO REMAIN IN CARDOSO SECOND TERM
It is precisely at these times when Cardoso depends on
Malan and Franco the most. The idea that he would send either
one packing after Sunday's presidential election, which Cardoso
is widely expected to win, is unfathomable, analysts said.
"It wouldn't make much sense changing the composition of
the economic team during a moment of turbulence like this,"
said Celso Pinto, economic columnist at Folha de Sao Paulo
newspaper.
Malan and Franco are widely respected in the international
business community and both frequently meet with European and
U.S. investors.
A former finance minister himself, Cardoso is heavily
involved in crafting economic policy. But his political failure
to get congressional backing for tough budget reforms has on
several occasions left Malan and Franco scrambling to patch
together emergency solutions on the fly.
So far, they have demonstrated a talent for the job.
MALAN AND FRANCO: THE MAGIC TOUCH?
Faced with a speculative attack on the real in October
1997, Brazil doubled interest rates and announced a $19 billion
package of tax increases and spending cuts. The measures staved
off a devaluation, which could have marked the end of four
years of economic stability.
The country was barely catching its breath when it was hit
by another financial tornado in August -- this time, a
devaluation in Russia which spawned a global retreat from
emerging markets as investors fled to safer U.S. securities.
Local stock markets plunged to their lowest level in more
than 2-1/2 years and a flood of dollars rushed out of Brazil on
fears the government would devalue the real, widely considered
overvalued by between 10 percent and 30 percent.
The Central Bank again responded by sharply hiking rates --
to around 50 percent -- in an effort to convince nervous
investors to park their cash in Brazil, while the government
announced more than $5 billion in new spending cuts.
But the tried-and-tested formula does not seem to be having
the same effect on the sickly economy the second time around,
and speculation is rife that the International Monetary Fund
and other global lenders will soon step in with financial aid.
Foreign investors, impatient with the slow pace of reforms
in Congress, are demanding Brazil tackle immediately the
economy's Achilles heel, namely a budget deficit of about 8
percent of gross domestic product.
Making matters worse, the tense days at the height of the
most recent crisis -- which saw stocks plummet 16 percent and
dollar outflows hit $2.9 billion in a single day -- have
reportedly exposed tensions between Malan and Franco.
LIKE CHALK AND CHEESE
Malan, 55, a veteran of international bodies like the World
Bank and United Nations, has been a mentor to Franco since they
were teacher and pupil at Rio de Janeiro's Pontificia
Universidade Catolica in the early 1980s.
It was Malan who named the brainy, Harvard-educated Franco,
13 years his junior, as director of international affairs when
Malan assumed the presidency of the Central Bank in 1993.
But colleagues say their personal styles are like chalk and
cheese.
Malan, with his trademark slicked-backed hair, takes a
cautious approach to interviews, fending off probes with the
well rehearsed tenets of Brazil's economic stabilization plan.
A consummate politician, he is a long-time friend of
Cardoso and is seen as a possible presidential candidate in
2002 if Cardoso is re-elected this year.
By contrast, the boyish and diminutive Franco -- who often
appears in public unshaven -- is a caldron of ideas, doodling
incessantly on a notepad as he talks to reporters and breaking
off occasionally to fire a scathing rebuttal at one of his
critics.
A prolific author on economic policy who hates to get up
early, Franco is content to pull the strings behind the scenes
and seems to have no craving for the media spotlight or public
office.
Respected by Cardoso, Franco has long been seen by markets
as Brazil's chief financial policy-maker, a perception that is
said to have led to friction with Malan in the past.
Franco was once forced to deny he referred to Malan as "Our
Lady Di" in a reportedly snide comment on the finance
minister's purported inability to formulate economic policy.
Some newspapers reported that Franco's decision to raise
rates on Sept. 10 -- on a day when government officials
repeatedly denied such a move was in the works -- left Malan
fuming to the point that he prepared a resignation letter.
Malan subsequently dismissed the rumors as "barroom gossip"
WHEN THE GOING GETS TOUGH...
Franco's favor with the president has allowed him to
weather sharp criticism for his insistence on maintaining a
strong currency despite its dependence on foreign capital.
But the Central Bank chief's association with a policy that
is increasingly viewed as unsustainable makes his position more
precarious than Malan's in the long run, said Luciano Dias,
political analyst at Goes e Consultores.
The rash of privatizations which have kept dollar inflows
high is beginning to dry up, and the massive currency outflows
of the last few weeks have depleted reserves to less than $50
billion from almost $70 billion at the beginning of August.
"Gustavo Franco is excessively linked to a policy which now
appears risky," noted Dias. "Pedro Malan is clearly a much more
flexible instrument."
In public, government officials have kept a united front,
repeatedly denying they are mulling controls on capital flows
or considering any change in the country's foreign exchange
policy.
Behind the scenes, Cardoso is said to be orchestrating
subtle shifts in his economic team to place more emphasis on
economic growth, although analysts agree that tinkering with
the strong currency policy would be politically suicidal.
Copyright 1998, Reuters News Service |
