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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: blake_paterson who wrote (26917)	12/5/1998 9:39:00 AM
From: blake_paterson	Respond to of 70976

And what about Brazil? Brazil: The Package Has Not Been Derailed Yet Carlos Janada (New York) - Morgan Stanley The original fiscal package announced by the Brazilian government was to generate a primary surplus of 2.6% of GDP, a fiscal effort of R$28 billion. From the beginning, we believed that there would be some slippage in the package and therefore assumed that the fiscal effort would amount to only R$22 billion. With the failure in Congress of a key social security bill and a likely delay of the CPMF tax on financial transactions, we estimate that the potential losses so far amount to nearly R$9 billion. If government is seriously committed to achieve at least the majority of its fiscal effort (something that we believe they must do in order to maintain its current economic regime), it might have to resort to additional revenues such as a tax on capital gains and on gasoline consumption. If the government is able to find alternative cuts or revenues, we believe that our R$22 billion estimation of the fiscal effort is still feasible. The implementation of the Brazilian fiscal package was running smoothly until last week. This week, the package suffered its first setback as Congress turned down an increase in social security contributions for retired civil servants. Furthermore, there's the potential risk that the approval of the CPMF tax will have to wait until next April. Given these events, where does the package stand and can the fiscal adjustment program still work? Let's quickly assess the "damage" that the package has received. First there's a high probability that Congress will approve the CPMF tax in April rather than January, as initially planned by the government. If this were the case, the government would start collecting the CPMF revenues in early July (because of a mandatory 90-day grace period required for new taxes in the constitution). Presently, the government collects the CPMF tax at the rate of 0.20%. This current tax expires on January 23. If the new legislation is not approved by January 23, the government would have to wait for the approval of the legislation plus the 90-day grace period. In order to get around mandatory delay, the government is claiming that the CPMF tax at the 0.20% level is merely an "extension" of the prevailing tax and therefore should not be subject to the grace period -- i.e., only the additional 0.18% would be subject to the grace period. This interpretation is still under discussion. To be conservative, let's assume that the government will have to wait until early July to start collecting the proceeds of the CPMF. The government was planning to receive R$16 billion if the CPMF tax was approved by January. Now with the financial transaction tax operating only part of January and resuming in July, the expected amount of revenues declines to about R$8.5 billion, i.e., the potential loss therefore amounts to R$7.5 billion. The defeat the government recently suffered in Congress represents a loss of about R$2.6 billion. But not everything is lost. The government most likely will resubmit the social security reform bill next February. If Congress approves this measure by March, the government could collect R$1.3 billion (again taking into account the 90-day grace period). Thus, the losses from the recent government's defeat in Congress could amount to only R$1.3 billion. Therefore, assuming there is a delay in the implementation of the CPMF until July and the government resubmits the social security bill and it is passed, the potential losses would amount to R$8.8 billion. But considering the international situation, Brazilian policy makers most likely will have to resort to alternative measures to compensate for the close to 30% of the package lost. What are their choices? We see two clear potential options for the government: 1) A tax on capital gains of pension funds and/or 2) a gasoline tax. Last September, in the middle of the market turmoil, the Brazilian supreme court ruled that the government could collect a tax on capital gains of pension funds retroactively for the last five years. The government estimates that it could collect at least R$2 billion per year from this tax. We believe that the collection of this tax all at once would put the Brazilian securities market under heavy stress. Therefore, the government would likely collect only revenues for 1998 and 1999, representing at least R$4 billion. The second option is a tax on gasoline. The imposition of a tax on gasoline would be a little bit more problematic from a legal perspective and the government would have to work harder if it wanted to implement one. But if the government decides to tax gasoline (on top of the existing tax) at a 20% rate of the prevailing price, it could potentially collect up to R$3 billion, according to our estimations. Despite the recent setback in the implementation of the fiscal package, the government might still have some means to at least minimize the damage to its fiscal package. It might not achieve the R$28 billion fiscal effort that it initially planned, but collecting R$22 billion could still be feasible.