FEATURE-IMF puts Brazil's fate in its
own hands
03:51 p.m Nov 20, 1998 Eastern
By William Schomberg
BRASILIA, Nov 20 (Reuters) - It has become a
familiar scenario in Brazil, but this time the stakes are
critically high and the whole world is watching.
President Fernando Henrique Cardoso, looking
stern, urges Congress to vote on essential but
long-delayed fiscal measures to stop the country from
plunging into crisis.
A stone's throw from the presidential palace,
government whips in parliament thrash out deals with
lawmakers from Brazil's myriad of political parties.
Hours later, often deep into the night, the government
wins a key vote. Markets are comforted, but only
until the next crisis erupts when the whole drawn-out
process begins again.
Now, saved from an Asia-style devaluation by a
$41.5 billion international credit line unveiled last
week, Cardoso has no choice but to finally ram
through Congress the kind of bitter fiscal medicine
Brazil has put off for more than a decade.
''The chances of complete meltdown were pretty
high three months ago. They've diminished for now,
but that's not to say they have disappeared
altogether,'' said Omar Borla, chief economist for
Latin America with investment bank Robert Fleming.
''The ball is in Congress' court,'' he said. THE KEY
TO CONFIDENCE
Approval of the tax increases, spending cuts and
other proposals included in a latest Brazilian austerity
plan is crucial to the government's hopes of
recovering the shattered confidence of international
investors.
Their faith, and their cash, is key to the long-term
survival of Brazil's currency, the real, the cornerstone
of a four-year economic recovery after decades of
runaway inflation.
Brazil's every move will also come under close
scrutiny from the International Monetary Fund --
which has tied most of its majority share of the loan
programme to progress in implementing the austerity
plan -- and from an array of governments that are
prepared to risk their taxpayers' money on Brazil.
An unprecedented 20 countries offered $41.5 billion
as part of the IMF-led deal, a sign of Brazil's
importance as the world's eighth-largest economy
and how much a full-blown crisis there could damage
global growth, officials say.
''I believe very much that Brazil is a firewall to the
rest of the world,'' said U.S. Undersecretary of State
for Economic Affairs Stuart Eizenstat. This week he
went to Brazil's Congress to test personally the mood
for reform.
Already there are signs that some of the $30 billion
which flooded out of Brazil in the wake of Russia's
devaluation is coming back on the strength of
international credit plan.
Traders on the Sao Paulo stock exchange said
foreign dollars were behind unusually heavy trading
this week.
Dollar outflows have slowed too, although a net
$700 million loss in the first two weeks of November
shows Brazil is far from in the clear, analysts said.
DIGGING OUT OF CRISIS
''We're digging our way out of the hole,'' said Paulo
Millmann, an economist with BicBanco in Sao Paulo.
''Whether we actually get out or not will be decided
over the coming months.''
As well as reopening Brazil's access to private credit
abroad, a key factor for cash-strapped local
companies, the performance of Congress on the
austerity plan will be a key factor in the scaling-down
of Brazil's towering emergency interest rates.
The Central Bank showed it would match fiscal
progress in parliament with rate cuts earlier this
month when it sliced the overnight rate by a few
percentage points to 38 percent after Congress finally
approved a long-delayed pension reform bill.
There was more progress late Wednesday when a
joint session of the lower and upper houses approved
two important decrees included in the austerity plan.
Officials say the measures will save more than $6
billion next year, an important contribution to the
government's $23.5 billion fiscal target for next year.
Some economists say Brazil's monetary policy
bosses should act more boldly and cut rates
aggressively.
As well as aggravating an expected recession next
year, the current 38 percent rate will add heavily to
the cost of servicing Brazil's roughly $260 million in
domestic debt, only complicating the government's
efforts to cut a huge budget deficit. HIGH RATES
AS PART OF THE PROBLEM
''These interest rates, in a virtually inflation-free
economy, are absurd,'' said Millmann of BicBanco.
''The government should bring them down to
pre-crisis levels (of about 20 percent) now.''
The budget deficit, expected to end 1998 at more
than 7 percent of gross domestic product, is the
bugbear of Brazil's economy, helping to spark panic
among foreign investors after the August devaluation
in Russia, which had a similar-sized fiscal shortfall.
Finance Minister Pedro Malan, who never tires of
explaining how Brazil's budget deficit is not directly
comparable with others, has proposed to cut the
shortfall to 4.7 percent of GDP by the end of 1999.
But that target has confused some economists who
say it does not tally with a previously announced
target for spending excluding debt. That could mean
rates might not fall as fast as the market expects or
that the government is conceding it might not get all
its $23.5 billion austerity plan approved, they say.
Carlos Eduardo de Freitas, an economist with the
independent think tank Fundacao Getulio Vargas,
said the government would risk a backlash from
investors should its scale back its targets.
''We just don't know what will happen when the
targets are revised,'' said de Freitas, a former Central
Bank director.
There are also concerns that a downturn in the U.S.
economy or further troubles in Asia could put Brazil
under pressure again. But with $41.5 billion in the
bag, most experts say Brazil has bought itself an
essential breathing space in its fight to finally get to
grips with its fundamental budget problems.
''I'm optimistic right now,'' said Borla with Robert
Flemings.
''I think Brazil will make it.''
((--Brasilia newsroom 5561 314 1193;
william.schomberg+reuters.com))
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