No devaluation of the 'reais/real' says Pedro Malan (Finance minsiter)Brazil.
Hi Lee:
So much for the damn rumor 'they' started yesterday afternoon,eh ?
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Top News
Wed, 28 Oct 1998, 10:05am EST
10/28 Brazil Outlines US$23.5 Billion of Spending Cuts, Higher Taxes to Win Aid Brazil to Cut Spending, Raise Taxes to Slash Deficit (Update2)
(Updates with more comments from Malan in 5th paragraph)
Brasilia, Brazil, Oct. 28 (Bloomberg) -- Brazil said it will
cut spending and raise taxes to slash its $60 billion budget
deficit by almost half, to bolster its currency and win backing
from international lenders.
Finance Minister Pedro Malan said the package, worth 28
billion reais ($23.5 billion) next year, will help cut Brazil's
growing budget deficit and bolster investor confidence in Latin
America's largest economy.
''We are fully capable of facing up to financial turbulence
through actions on the domestic front,'' Malan said. ''The
challenge is set: (without these steps) we're on the road to
fiscal insolvency.''
The long-awaited package, unveiled in Brasilia, should pave
the way for $30 billion in aid from the International Monetary
Fund and other lenders in coming weeks. Brazil needs help to pay
its debt after a global credit crunch cut off Brazil from capital
markets.
Concerns that Brazil, the world's ninth largest economy, may
be forced to weaken its currency amid the credit crunch has
pushed down global stock markets and the U.S. dollar today. Malan
said there will be no change in foreign exchange policy.
The measures were lauded by investors, though Brazil must
still pass the cuts through congress, where lawmakers may be
reluctant to boost taxes, especially on government workers.
Brazil's benchmark stock index rose as much as 2 percent.
''Now all eyes are off Malan and his economic team
on the Congress and whether (it's) going to be able to live with
these'' measures, said Carl Ross, head of Latin American
sovereign research at Bear, Stearns & Co.
The measures for 1999 include 15.9 billion reais in tax
increases, 8.7 billion reais in government spending cuts and cuts
in social security spending, such as pensions, to save 3.5
billion reais.
The changes are expected to save Brazil even more money in
later years, reaching 34 billion reais in 2000 and 38 billion
reais in 2001.
Recession Looming
The measures, along with high interest rates, are expected
to push Brazil into a recession next year, with the economy
declining 1 percent next year, the government said, down from
growth of 0.5 percent this year. The economy should rebound in
2000, rising 3 percent, and by 4 percent in 2001.
Specific measures include an increase in a financial
transaction tax to 0.38 percent for 1999, from 0.20 percent. The
rate would fall to 0.30 percent in 2000. This applies on all
transactions, including checks and bank withdrawals.
Retired government workers, now tax exempt, will begin to be
taxed at a rate of 11 percent on their pensions. The total raised
from taxes on government employees is about $3.6 billion.
President Fernando Henrique Cardoso, speaking in a televised
address Tuesday night, said the measures would help restore
confidence in the nation's currency, the real. Speculation that
the deficit would force Brazil to devalue has prompted an exodus
of $30 billion in the past two months.
Soaring Rates
Running a deficit has also forced Brazil to maintain high
interest rates to keep the real strong. Overnight lending rates
of 42 percent have dampened consumer spending, prompted companies
to lay off workers and threaten to throw the economy into
recession next year. The government expects rates to fall to 20
percent or 25 percent next year and 15 percent or 20 percent by
2000.
Brazil must take steps to reduce its deficit to win approval
of an aid package of as much as $30 billion from the
International Monetary Fund, the World Bank and other lenders,
including the U.S.
The spending cut of 8.7 billion reais, which is about 5
percent of the country's 1999 budget of 187.8 billion reais, are
within economists' expectations. They were expecting cuts
somewhere between 8 billion reais and 10 billion reais.
The tax increases were also expected.
In addition, Cardoso urged Congress to approve measures to
cut spending on pensions; pledged to get states to cut spending
on salaries and enforce balanced spending at all levels of
government. In addition, he said he would send a bill to Congress
to simplify Brazil's tax code and reduce corporate costs.
The fiscal package aims to ensure a primary budget surplus,
before interest payments, of $21 billion, or some 2.6 percent of
gross domestic product next year. Brazil agreed to this target in
a preliminary agreement with the IMF this month.
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