Investors Overreacting to Brazil Debt Problems, World Bank Says
Investors Overreacting to Brazil Debt Problems, World Bank Says
Washington, Jan. 12 (Bloomberg) -- Investors are
overreacting to the debt moratorium declared by a Brazilian state
and ignoring the federal government's success in cutting spending
and raising tax revenue, a World Bank official said.
''The reaction of markets has surprised us,'' Gobind
Nankani, World Bank country director for Brazil, said in an
interview. ''Hopefully, markets will begin to look again at the
behavior of the executive (branch), the behavior of the congress,
the behavior of other governors and not overreact to the Minas
state'' situation.
Brazil's stocks and bonds tumbled to their lowest level in
four months on growing doubt the government can defend its
currency and revive the economy. Concern was sparked last week
when the state of Minas Gerais said it ran out of cash and
wouldn't make payments for at least three months on the 18.5
billion reais ($15.3 billion) of debt it owes the central
government.
That triggered fears other states may balk at meeting debt
obligations to the federal government, which is trying to raise
taxes and cut spending to meet terms of a $41.5 billion loan
package organized by the International Monetary Fund. The World
Bank is contributing $4.5 billion to that aid.
Brazil's Bovespa stock index fell 7.62 percent today to
5915.55. The country's benchmark ''C'' bond fell 2.9 percent,
driving its yield to 17.5 percent.
''These hiccups are a constant feature of the scenery (in
Brazil) and they lead to negotiated solutions that are far, far
less worrisome than the initial salvos would suggest,'' Nankani
said of the debt dispute. ''I don't see any evidence of it
spreading rapidly to other states.''
The market instability isn't likely to affect the World
Bank's overall program in Brazil, he said.
Cardoso Committed
U.S. Treasury Secretary Robert Rubin also expressed support
earlier today for Brazil's economy, saying President Fernando
Henrique Cardoso was ''absolutely 100 percent committed'' to
carrying out the reform plan.
The developments in Minas Gerais ''were not constructive''
and the ''key is for President Cardoso to do what he has
committed to do, and he is,'' he told reporters after meeting
with Argentine President Carlos Menem.
Menem offered his own words of backing.
''I don't believe Brazil will devalue its currency,'' he
said. ''With Brazilian reserves at present, they can sustain any
kind of crisis. They have lost a lot but they still have a lot.''
At least $500 million left the country today as investors
withdrew funds, money market traders said. Foreign currency
reserves are now at a low of $36 billion, down from $74 billion
in August, before Russia defaulted on its debt, prompting
investors to flee emerging markets throughout the world.
Crisis of Confidence
That capital flight has one investor so alarmed that he said
Brazil's IMF aid package is clearly failing.
''I'm really starting to wonder where Brazil is going to get
the $60 billion in foreign currency it needs this year,'' said
Francisco Gros, chairman of Morgan Stanley & Co.'s Latin America
unit and president of Brazil's central bank from 1991 to 1993.
''I'm not seeing any possibility of debt sales at the moment.''
Brazil, Gros said, is dependent on foreign currency, not
merely to finance government and corporate debt, but to finance
its imports and current account deficit.
And as money continues to flow out of the country, it's
becoming clear that Brazil's efforts to end the crisis of
investors' confidence in its economy with aid from the IMF and
World Bank has failed, he said.
An average of $240 million left the country daily in
December. So far this month, an average of $180 million is
fleeing Brazil.
'Untenable'
''It's simple, you've got public money flowing in and
private money flowing out,'' he said. ''It's untenable, it's
failed.''
Still, the World Bank board is scheduled to consider another
$1 billion in loans to supplement the government's budget before
June 30, Nankani said. Another $2.5 billion would be made
available after July 1.
The World Bank approved $1 billion in loans last week to aid
the government's efforts to overhaul the social security system
and protect the poor.
The Brazilian government has already drawn $9 billion from
the IMF-led package to supplement dwindling foreign currency
reserves. Brazil can also expect about $1 billion in World Bank
loans for education, health and water sanitation projects,
Nankani said.
Tax Increases, Budget Cuts
Brazil announced last month a series of emergency measures
to raise an additional 6.7 billion reais to help slash the budget
deficit.
The moves include receiving 1.4 billion reais in advance
payments from the $19 billion sale in July of Telecomunicacoes
Brasileiras SA, the former state phone company. The payments were
to be made in 2000.
Brazil also plans to increase the base of an investment tax,
raising an additional 1.9 billion reais between February and
July. Removal of some income tax deductions for companies will
bring in 2.1 billion reais a year.
These measures, often used by the government to leapfrog
immediate approval by congress, are a response to lawmakers'
delays in passing proposals aimed at slashing the $64 billion
budget deficit almost in half next year. The new taxes must still
be approved by congress at a later date, but they go into effect
immediately.
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