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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: Steve Fancy who wrote (11592)	1/13/1999 3:16:00 PM
From: Steve Fancy	Read Replies (1) \| Respond to of 22640

Brazil reform, currency have further to go-experts Reuters, Wednesday, January 13, 1999 at 14:38 By Ian Simpson NEW YORK, Jan 13 (Reuters) - Brazil's effective currency devaluation and the resignation of the Central Bank chief Wednesday show the country has further to go on its path to fiscal health, analysts said. In gloomy assessments of Latin America's biggest economy, they told Reuters Brazil's inflation-busting currency, the real, could keep sliding even with the de facto devaluation. Brazil's effective devaluation and the resignation of Central Bank President Gustavo Franco, a staunch defender of the real, sent shockwaves through world markets fearful of an Asian-style meltdown in the world's eighth-biggest economy. Susan Gilbertson, head of Latin American research at Paribas, said an international aid package had given Brazil breathing room to enact reforms aimed at trimming a yawning budget deficit. The nagging shortfall of about 8 percent last year of gross domestic product forced Brazil to jack up interest rates and head into recession. However, reformist President Fernando Henrique Cardoso has faced a balky Congress in his fight to pass the austerity legislation. In an effort to calm the financial maelstrom this morning, Cardoso noted that "the Congress already approved 70 percent of what we've asked in terms of fiscal austerity. What is left to approve is the federal budget, which will be approved." Cardoso suffered his one major setback in getting legislation approved in December, a pension measure that would have cut benefits to widows and retired civil servants. But he is also expected to face very stiff opposition on the CPMF, or "check" tax, increase that would raise 7.0 billion reais ($5.3 billion). The announcement last week that Minas Gerais, one of the biggest states, would freeze debt payments to the federal government prompted investors to flee Brazil and renewed pressure to devalue, Gilbertson said. However, the federal government has retained some transfers to Minas Gerais to cover debt payments as they come due. "They lost the battle of the PR (public relations)," she said. "They are back to what they need to do -- expenditure cuts." Federico Laffan, Latin American portfolio manager at Warburg Pincus, called the Brazilian developments "pretty disastrous." He said the turmoil was linked to Brazil's fiscal troubles "and the lack of progress and mixed signals you get out of the political players ... on the commitment to reform." The dollar rose by 8.8 percent against the real after the Central Bank replaced a tight mini-band in which the currency had traded before with a far broader band. The real was trading at 1.318/1.32 to the dollar, close to the 1.32 floor of the new, wider band. Brazilian debt fell at the start of Wednesday's trading and then pared their losses. Sao Paulo's Bovespa stock index (INDEX:$BVSP.X) fell more than 10 percent at the start of trade, then clawed back to be down 5.4 percent after traders said they saw the government in the market buying stocks. Brazil's Cardoso moved to calm panicked markets by saying Congress would soon approve key austerity measures needed to gain credibility abroad. Fred Searby, a Latin American stock analyst at SG Cowen, called Franco's resignation "extremely negative for the market." "They had a window of opportunity (to enact reforms) and sentiment turned when the issue of the states' (debts) came through," he said. Arturo Porzecanski, Latin American economist at ING Barings, pointed to the collapse of the Mexican peso in late 1994 as an example that devaluations, once started, were hard to halt. "You have opened up the expectation that this is an intermediate step in a road that has further to go," he said. Paribas' Gilbertson said the real could overshoot to as low as 1.7 to the dollar before it stabilized and Brazil became attractive again. Copyright 1999, Reuters News Service