Moody's skeptical about short-term Brazil outlook
Reuters, Monday, October 12, 1998 at 14:00
(Press release provided by Moody's Investors Service)
NEW YORK, Oct 12 - Brazil's recent presidential and
congressional elections offer the country an opportunity to
step up thorough state and public-sector reforms as a way of
addressing its formidable public sector deficit. Fiscal and
political constraints, however, "leave little room for
short-term optimism," write Moody's Investors Service sovereign
analysts Ernesto Martinez-Alas and Vincent Truglia.
As things now stand, the rating agency sees little hope yet
that the reelected Cardoso administration can reduce the
federal deficit smoothly or rapidly or implement necessary
constitutional and structural reforms soon enough to lure
non-resident investors back to Brazil's financial markets.
Perhaps, the rating agency says, if results could be made
visible quickly, financial markets could provide Brazil and Mr.
Cardoso with another chance to tackle the nation's economic
problems.
But, says Vice President and Senior Analyst Ernesto
Martinez-Alas, that despite the likelihood of an IMF-sponsored
financial aid program's being announced in the near future, "we
are not optimistic that a financial-bailout package large
enough to reassure resident and non-resident investors will
materialize at any time soon," with the emphasis upon the size
and terms of any such package being crucial.
"Furthermore," he adds, "we are skeptical about whether the
administration itself could assemble a convincing enough and
well-balanced policy package that would let it lower domestic
interest rates without unduly pressuring the exchange rate."
Political Coalitions and Speed Are Key Even before
President Fernando Henrique Cardoso's election to a second
term, he announced budget cuts and key fiscal measures, a new
round of constitutional amendments, and tax reform that he will
present to congress before year-end.
Approval of this legislation and the proposed
constitutional amendments, however, continues to depend on
President Cardoso's ability to negotiate coalitions -- on an
issue-by-issue basis -- on a characteristically unruly
congress.
Furthermore, given the tortuous amendment procedure,
approval may take months.
In the analysts' opinion, Brazil's economy requires quicker
action than that.
These concerns, say the rating agency, are contained in
Brazil's recent rating history.
On June 8, 1998, Brazil's debt, rated B1 for foreign
currency bonds and notes, and B2 for foreign currency bank
deposits was assigned a negative outlook. Local currency bonds
issued by the Brazilian government were also rated B2.
Subsequently, on September 3, Brazil's foreign currency
bonds and notes were lowered to B2, with foreign currency bank
deposits and local-currency-denominated government bonds
lowered to Caa1.
Economic Balancing Act Low inflation, which has been
Cardoso's main political asset and the foundation of his
popularity, is likely to remain a priority in his second term.
But low inflation -- and with it, gains in real earnings --
have rested on a policy mix that combines tight money, loose
fiscal discipline, and a strong currency.
Before the election, the Cardoso administration drew on
financial reserves to sustain its policy mix. Post-election,
however, what will sustain Brazil's policy and reform efforts
is a credible long-term solution to its widening fiscal
deficit.
As the nominal deficit widens, so does Brazil's stock of
domestic debt which still largely remains in the hands of
residents.
Although the estimated share of non-resident debt holdings
had increased, after the Russian economic meltdown,
non-residents fled the Brazilian debt market.
The rapid increase in domestic debt needs residents'
confidence.
After all, sharply higher interest rates -- some as high as
50% on an annualized basis -- cannot be sustained for too long
before debt holders begin to question whether the government
can pay them back.
Copyright 1998, Reuters News Service |
