Worst May Be Yet To Come in Brazi
Monday, 8 February 1999
R I O D E J A N E I R O , B R A Z I L (AP)
BRAZILIANS HAVE a saying that when the team is winning, everybody plays
well and the team's captain shines. President Fernando Henrique Cardoso
knows the feeling.
Until recently, Cardoso was the hero of Brazil's most successful
anti-inflation crusade ever. His popularity was breaking records, and he
breezed to re-election in October.
But ever since Brazil's currency took a tumble on Jan. 13, less than two
weeks after his inauguration, Cardoso has been struggling to save the real,
the shreds of his anti-inflation plan and his own presidency.
The real - which Cardoso he used to call Brazil's "passport to
modernization" - has lost 35 percent of its value against the dollar. Inflation
is roaring back, after plunging from 2,700 percent in 1993 to about 2
percent last year.
While there's no consensus on how to fix Latin America's largest economy,
everybody agrees that the treatment will be long and painful, and that the
worst may be yet to come.
Last week, the government and the International Monetary Fund set up the
prescription: deeper budget cuts to reduce the deficit and high interest rates
to curb inflation.
Many analysts wonder how Brazil will do it.
Interest rates, now at 39 percent, put a tremendous strain on the
government's domestic debt, which last year rose to 305 billion reals, or
about $164 billion. The increase is equivalent to some $175 million a day.
That is more than $2,000 per second.
Meanwhile, the economy spins towards stagflation, a dire condition of
simultaneous inflation and economic contraction. Brazil's economy is
expected to shrink some 3 percent this year while also struggling with
double-digit inflation. That will only worsen the eternal inequalities of
Brazil, where the richest 10 percent earn 30 times more than the poorest
40 percent.
"The social consequences of new economic adjustments will be traumatic,"
said Sergio Mendonca, director of DIEESE, a union-linked think tank.
As the real plummeted, the government named a new president of the
country's central bank - the third in three weeks. The choice of Arminio
Fraga Neto, a former associate of billionaire financier George Soros,
calmed markets and strengthened the real to around 1.80-1.90.
Still, it seems everyone - in Brazil and abroad - has a prescription on what
should be done.
Some think Brazil should privatize oil conglomerate Petrobras and Banco
do Brasil. Others say the country should adopt a parliamentary system of
government, in which Cardoso would appoint prime minsters but would
lose some presidential powers.
Argentina's President Carlos Menem urged Brazil to adopt his country's
system that ties the currency to the dollar. Although Cardoso discarded the
idea, Menem is likely to insist on it again when they meet Friday to discuss
the impact of Brazil's crisis on Mercosur, the trade bloc that includes
Uruguay and Paraguay.
Brazil is the main trade partner of every country in the region. A
continent-wide crisis could affect even the United States, which sends 20
percent of its exports to Latin America.
Nobody here expected the crisis to unravel so quickly.
"The storm found us without an umbrella. It's been only a few weeks, but
(Cardoso's) second term looks already totally worn out," said political
analyst Villas-Boas Correa.
It's a sharp contrast with 1994, when the newly created real was stronger
than the dollar and sent consumers on a buying spree.
For the first time in decades, Brazilians had a taste of economic stability.
Inflation measured from 1829 to 1993 it showed cosmic dimensions: A "6"
followed by 18 digits.
Now, inflation is back. Sao Paulo, Brazil's biggest and wealthiest city,
recorded inflation of 1.38 percent in January, more than the 1.18 percent
for all of 1998.
Unemployment, which hit a 15-year high of 7.6 percent last year, is now
likely to surpass 10 percent and make recession even worse.
"Without consumption there is no reason for production, and without
production there is no reason to keep jobs," said Antonio Ermirio de
Moraes, head the Votorantim Group, Brazil's largest private industrial
conglomerate.
Unions want jobs. State governors want debt relief. Cardoso wants time to
deal with problems individually, but he may not have it.
"He must act quickly and show results, that inflation will not make a
comeback," Correa said. "He can still hold inflation to a single digit.
Otherwise public rejection and protests will confine him to the Planalto
(presidential) Palace." |
