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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (735)	1/9/1999 12:08:00 PM
From: Worswick	Read Replies (1) \| Respond to of 2794

Tell me how this sucker isn't going down?? Copyright (C) NY Times, For Private Use Only A Joust With Inflation, Recession and Huge Foreign Debt By DIANA JEAN SCHEMO RASILIA, Brazil -- If investors were buoyant over Brazil's prospects in 1997 and sobered by its vulnerability to a world credit squeeze in 1998, they are focused this year on the government's efforts to cut costs and reduce debt. As South America's largest country, with nearly 165 million people, half the continent's population, and 40 percent of its gross domestic product, Brazil will in some measure affect every economy in the hemisphere as it succeeds or fails. Investors and economists from Caracas to Santiago will be watching it closely to gauge their prospects. INTERNATIONAL Outlook 1999 Home Related Articles Europe: Euro Debuts in 11 European Nations The Euro: Four European Countries Stay Out of Monetary Union Russia: In an Economy of Survival, Optimism Has a Wan Smile Asia: Regaining Confidence as Its Stability Returns China: Thriving, but Critical Year Lies Ahead Japan: Bracing for Another Year of Reckoning, Amid Signs of Change Travel: Price Rises Ahead for Road Warriors But uncertainty about 1999 abounds. Some economists question the prescription that Brazil accepted in November under a $41.5 billion loan package arranged by the International Monetary Fund. President Fernando Henrique Cardoso is committed to carrying out a combination of spending cuts and tax increases totaling $84 billion. The IMF hopes that interbank interest rates, which are now above 30 percent and at one point soared above 50 percent, will come down to 16 percent or 18 percent in the final months of 1999. But continuing pressure on the country's currency, the real, may make that impossible, and tax revenue would decrease under a deepening recession. Critics speak of a vicious cycle and warn that supporting an overvalued currency with high interest rates may only deepen Brazil's debt problem by stifling growth and raising the cost of government borrowing. Consumer interest rates were at annual rates of 70 percent to 100 percent at the end of 1998, and economists expect that any lowering of interbank rates will be passed onto consumers very slowly. Politically, the government appears ready to square off not so much with the opposition as with its own notoriously unruly allies. The legislative wrangling already in evidence at the close of last year blocked the president's attempts to convene a special session of Congress to extend a tax on financial transactions. That conflict may foreshadow bitter disputes to come between Cardoso's government and its coalition partners, which are already positioning themselves for presidential elections in 2002. "No matter what," said Theresa Paiz, vice president for sovereign risk analysis at Thomson Bank Watch, "it's going to be a hard year." Economists are predicting that the hardest months of recession will come in the first half of the year. Morgan Stanley Dean Witter estimates that economic output will shrink 7.5 percent from January through March and 5.7 percent in the second quarter. Most analysts expect Brazilian output to fall by 1.5 percent to 3 percent. Its Social Security deficit, even with the legislate tightening that the government is proposing, is likely to hit $40 billion, and commodity prices are expected to sink further. Unemployment, officially at 7.3 percent, may reach 12 percent this year. The IMF loan package is reassuring banks and investors somewhat. Up to $37 billion of the IMF money could be available this year if Brazil meets targets for government savings and reforms under its letter of agreement with the fund. The government is aiming to bring its budget deficit, swollen to 8.3 percent in 1998, down to 4.7 percent next year. But it is less confident of reaching the 2.6 percent primary surplus -- a figure that reflects revenue minus expenses, without interest on debts -- that it promised the fund for 1999. Costs for Brazil's foreign debt, expected to reach $250 billion in 1999, are rising. Vincent Truglia, a managing director of Moody's Investors Service, expects Brazil's medium- and long-term foreign debt to exceed 70 percent of the value of exports in goods, services and financial transfers, up from 60 percent in 1997 and 44 percent in 1996. Roque Sut Ribeiro at Marka Nikko Asset Management said that some $250 billion of domestic and foreign debt would have to be refinanced in the next 12 months. And Truglia said that "since the government can't determine in advance what interest rates will be, it can only try to deal with what's in its power." Brazil expects to make at least $21 billion this year through a series of privatizations, starting with the sale of "mirror licenses" in telecommunications. The sales open the field for private phone companies to compete with those that paid $18 billion for pieces of the Telebras communications holding company in July. Important sales in electrical energy are also likely to move forward. Major economic decisions will unfold in Congress, which faces votes on simplifying Brazil's confusing patchwork of 60 kinds of taxes, cutting long-generous pension benefits for civil servants, and detailing the criteria for laying off tens of thousands of those workers. The government is also planning to extend a special tax on corporate earnings, set to expire next year, until 2006, and to increase it to 3 percent from 2 percent. Such steps will not come easily amid the public hardship that is expected to deepen. Investors will be watching, Truglia said, for Brazil's ability "to sustain these kinds of different economic policies for a considerable period of time, as the negative consequences of the adjustment become felt."