LA Times. Inflation Fears Rise in Brazil. Weak Currency May Imperil Buying Power of Working Class
latimes.com
Saturday, January 23, 1999
By CHRIS KRAUL, Times Staff Writer
IO DE JANEIRO--Francisco Ribeiro's expression
turns grim as he recalls the Brazil of the early 1990s,
when prices rose by the hour.
"It was horrible," the 38-year-old delivery man said this
week as he hustled a load of hotel laundry up a busy street in
Rio's storied Copacabana district. "You had to hurry to buy
things because by the afternoon they were already too
expensive."
What rekindles the memory is this month's devaluation of
the Brazilian currency, the real, a step that threatens to reignite
spiraling inflation--a prospect that resonates uniquely for
Brazilians. Hyper-inflation--rates that climbed as high as
2,700% in 1993--victimized Ribeiro and other working poor,
who for more than two decades suffered as prices for goods
soared while paychecks remained largely unchanged.
Hyper-inflation's reappearance would also be devastating
for the hundreds of U.S. companies that have invested billions
of dollars in Brazil in recent years, betting on continued stability
in one of the globe's prime emerging markets.
During the hyper-inflationary era, Ribeiro remembers
running to the supermarket on paydays to buy food before
prices rose, sometimes twice in a day. He fought other
shoppers for rice, beans and other staples, filling three
shopping carts per trip. His wages were indexed to inflation,
yet his pay always fell short of price hikes.
Brazil's working class then was enslaved to a currency that
lost value by the hour. While the wealthy had access to financial investments and
accounts that shielded them from hyper-inflation's effects, Ribeiro was unable to
save or plan for the future, spending most of his paycheck the day he got it, just
hoping to make ends meet for his wife and son.
But things got better after the 1994 election of Fernando Henrique Cardoso and
the introduction of his Real Plan, an economic program anchored by low inflation
and a stable currency. Inflation was all but eliminated; it dropped to just 1.8% last
year.
Aided by a 40% minimum-wage hike that Cardoso pushed through in 1995 and
the new availability of consumer credit, Ribeiro now enjoys a much better standard
of living. He recently bought his first television, new bedroom furniture and a
refrigerator.
This month's devaluation abruptly changes that landscape. Though intended to
halt the outflow of foreign capital, make exports more competitive and correct what
was seen as an overvalued real, the weakening of the currency breeds inflation by
instantly making imported goods more expensive.
"You have consumers in Brazil that you didn't have [before], buying things like
yogurt and shampoo and appliances they had before never used or owned," said
Peter Stern of the American Chamber of Commerce in Sao Paulo. "Hyper-inflation
would disenfranchise that new class of consumers."
Rising Prices, Rising Skepticism
Already, price increases of 4% to 20% were announced last week on a range of
products from electricity, soy oil and beer to pasta, paint and automobiles, most of
which are either imported or made from imported components.
Working-class Brazilians seem skeptical that the government can navigate the
perilous waters ahead, and they are suddenly hearing too many echoes of the past.
"It's all manipulated. If the dollar continues to rise, it will be difficult to control,"
said Lucia Siqueira, an operator at Telerj, Rio's telephone company.
Still, most experts say Brazil's inflation can be limited to 5% to 10% in 1999 if
the real's devaluation holds near its current 30% loss against the dollar and if the
government avoids serious missteps.
Brazilian markets remained jittery Friday as the country's largest stock index,
Sao Paulo's Bovespa, closed down 1.79% at 7,190. The real gained 3%, closing at
1.71 to the dollar, although it was rumored that the Central Bank intervened
temporarily to prop it up after Thursday's 8% drop.
Despite the free float of the currency since Jan. 13, foreign reserves continue to
drain away, with a minimum of $200 million leaving the country Friday after
Thursday's $405-million loss.
The continued capital flight has provoked calls for Brazil to adopt additional fiscal
measures, including tax hikes and budget cuts, to put its finances in order.
Responding to rumors, Central Bank chief Francisco Lopes said Friday that the
government was not considering imposing capital controls as a means of stemming
the exit of foreign cash.
The market gyrations partly reflect mounting uncertainty about Brazil's economy
in general. In particular, the fear on the streets is that inflation could touch off a
spiraling cycle of increases in the price of goods and in wages and erase the
hard-won gains of the last five years.
"I hope it doesn't come back. It was a very hard life," said window installer
Amalio Goncales of the hyper-inflationary era. "We never could win; we always
lost."
A return of hyper-inflation also would be devastating to foreign companies such
as Procter & Gamble Co., Renault, IBM Corp. and others, which last year alone
spent $23 billion on factories, offices and stores to sell their products to Ribeiro and
millions of other newly minted consumers.
Foreign companies came largely betting that the stability brought by Cardoso's
policies would continue, and until now it's paid off. For many firms, including
General Motors Corp. and Whirlpool Corp., Brazil has been the best market of the
1990s. All that could be suddenly jeopardized if hyper-inflation takes off and
consumption is crippled.
Currency devaluations always breed some inflation, at least in the short term as
an economy adjusts for the higher cost of imported consumer goods and industrial
components.
Recession May Curb Inflation
For Brazil, that's a big adjustment: About 13% of all consumer goods are
imported and half are tradable, or price-competitive, on global markets and
therefore vulnerable in lesser or greater degrees to a devaluation.
"If the government does its job correctly and limits negative expectations, I feel a
6% to 7% inflation rate will be sufficient and hyper-inflation will be avoided," said
Juarez Ruzzieri, an economist at the University of Sao Paulo and an inflation
specialist.
He bases his optimism on the ironic fact that Brazil is heading into a deep
recession, which will cause demand for goods to decline sharply, reducing the ability
of producers to pass through price increases. The government has also raised bank
interest rates to 32%--annual credit card rates are as high as 120%--to limit
spending and thereby ease price pressures.
For the time being, upward wage pressures--a major factor in pushing up
inflation--are low because of rising unemployment rates, expected to reach 13% this
year from 7.5% in 1998 because of the coming recession. That means people such
as Ribeiro who have jobs probably would not risk them by striking or demanding
higher wages.
But Marcelo Sereno, national director of Brazil's largest labor union, the United
Workers Central, said that his members could stand only so much in cost-of-living
increases and that they would consider asking for wage increases if inflation rose
more than 10%.
"It's not an easy situation. How can you ask for more compensation when you
have a recession and increasing unemployment?" said Sereno, whose union
represents 19 million workers.
For Paulo Levy, an economist here with a government-sponsored think tank, the
Institute for Applied Economic Research, the critical threshold for avoiding spiraling
inflation is in a devaluation of no more than 50%.
Devaluations exceeding that level lead to sharp price rises in imported and
tradable goods that get "transmitted to other products in the economy," a ripple
effect that leads to a speculation and possibly broad-based wage-price spiral, Levy
said.
Government May Lower Taxes
Cognizant of the risks, the government is poised to take anti-inflationary
measures, saying it may soon ease import tariffs on some foreign goods and lower
domestic taxes to minimize the devaluation's effects.
In a largely symbolic gesture but one that nonetheless reflects the high stakes,
Brazil's Justice Ministry launched a public awareness program Thursday, inviting the
public to denounce abusive price increases over a public hotline and threatening to
subject gougers to fines and public ridicule.
"It's quite clear that controlling inflation is the most important thing before the
government right now. It's what got Cardoso elected twice, after all," said Sidney
Weintraub, an economist at the Center for Strategic and International Studies in
Washington.
"It took a long time to get here," said Rosalia Pereira, a government health
worker, referring to her improved standard of living, which is now in jeopardy.
"Who pays for the government's mistakes? Always the poor people."
* * *
Increasing the Risk?
Brazil's inflation rate was out of control in the late 1980s and early 1990s. That
changed after the election of Fernando Henrique Cardoso in 1994, but now the
devaluation of the country's currency, the real, increases the risk of inflation's return.
Brazil's annual inflation rate:
1993: 374.5%
1998: 2.5%
Source: Datastream
* * *
Times news assistant Paula Gobbi in the Rio de Janeiro bureau contributed to
this report.
Copyright 1999 Los Angeles Times. All Rights Reserved
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