Brazil's Once-Jittery Economy Is Getting Under Self-Control
By LARRY ROHTER -- April 23, 1999
SAO PAULO, Brazil -- Three months after the largest
economy in Latin America seemed on the verge of an
Asian-style meltdown, provoking alarm in markets around
the world, Brazil is bouncing back.
After an initial burst of price increases, always a
main anxiety in this country haunted by a history of
four-digit inflation, shoppers are demanding that
prices hold steady and forcing stores to comply.
"The consumer has it in hand to reject any price
increase," proclaims a sign outside a McDonald's on
Avenida Paulista, the main street of the bustling
financial district here in South America's largest
city.
As a result, inflation forecasts are about half the 17
percent originally expected.
And just as it has done since Brazil's financial crisis
erupted in January, causing a 40 percent decline in the
value of the local currency, the real, the nation's
central bank continues to buy and sell currency in the
foreign-exchange market to help stabilize the real's
value. But the real has proved to be so resilient that
the objective these days is not to prop it up but to
prevent it from strengthening too much.
The benchmark interest rates, which tend to be slightly
higher than the interbank lending rate, choked off
borrowing after it was raised to a punishing level of
50 percent to discourage investors from taking their
money out of the country. But now it has fallen to less
than 34 percent and seems likely to slide further. Many
investors view this decline as a sign of the economy's
underlying strength and are putting more money into
Brazil. Foreign reserves, a barometer of international
confidence in the country, have climbed nearly $8
billion in the last month to more than $42 billion.
The stock market, another highly visible measure of
Brazil's resilience, has risen 50 percent from
near-record lows hit in the first turbulent days of the
crisis, more than recovering its losses.
Foreign confidence in Brazil's future is also seen in
the Brazilian government's return to international
capital markets, something that would have been
unthinkable just weeks ago. On Thursday, with strong
demand, Brazil sold $2 billion of five-year notes.
Privatizations of state-owned businesses have also
resumed. Just last week a local gas company was
auctioned for $1 billion, nearly double the anticipated
price.
"The sleepless nights of January," as Finance Minister
Pedro Malan put it in an interview last week in
Brasilia, have given way to a cautious resurgence of
optimism about the country's economic health and
prospects.
Of course, the crisis that began here last August with
Russia's default is by no means over. But the talk of a
Brazilian "contagion" has all but vanished, and the
risks have been reduced to levels that Brazilian
officials consider manageable.
"I suppose we are entering the end of the hurricane," a
visibly relaxed Fernando Henrique Cardoso, Brazil's
president, said in an interview last week in Brasilia,
just hours before leaving on a trip to Europe to meet
with heads of state and investors there. "My feeling is
that we are overcoming it."
Foreign economists agree with that assessment. "The
situation in Brazil, and in Latin America in general,
is today much brighter than it was two months ago,"
Michel Camdessus, managing director of the
International Monetary Fund, said Wednesday in
Washington at the fund's annual spring meeting.
"What we see in the strengthening of the vitality of
the economy of Brazil," he added, now means that "we
expect to have been wrong in forecasting the magnitude
of recession in Brazil for this year."
Over all, Brazil seems to be well on its way to
complying with the terms of the $41.5 billion rescue
package it signed with the IMF in November but then was
forced to revise after the collapse of the real in
mid-January. In fact, most of the goals set for the end
of 1999 -- such as an exchange rate of about 1.7 reais
to the dollar -- have already been achieved.
For the most part, though, Brazil's 165 million people
have yet to feel the effects of the turnaround. Indeed,
many continue to suffer from the austerity imposed by
the crisis.
The country remains in a recession, and in some ways
the quick recovery in the currency's value has actually
hurt.
Exporters who had expected a bonanza in sales as a
result of the January devaluation, which makes
Brazilian goods cheaper abroad, are now scaling back
their predictions. The Cardoso administration and the
IMF had predicted an ambitious trade surplus of $10.6
billion for 1999 in their March accord, but most
analysts now expect the figure to come in around $6
billion.
"The fall of the dollar has been more rapid than we
expected," Cardoso said.
But the real's speedy recovery has also distinguished
Brazil from the East Asian nations that were forced to
devalue their currencies in 1997, helping to set off
the global financial crisis. Cardoso called that
distinction a sign of Brazil's basic economic
soundness. "Inflation has been controlled, and the
economy is in good shape," he said. "No company has
gone bankrupt, and no banks. And what debt has not been
paid?"
Cardoso's hand has been strengthened by the apparent
willingness of the average Brazilian to tolerate a
recession so long as there is no renewal of the
hyperinflation that afflicted the country before his
election in 1994. Even labor unions that initially
wanted to reintroduce a policy of indexing wages to
price increases have dropped that demand, indicating
they will settle for a modest increase when a new
official minimum wage is announced on May 1.
"Every Brazilian was frightened when the real took that
big drop against the dollar because we thought it meant
inflation was coming back," said Daniel Glaucio de
Oliveira, a 23-year-old textile salesman. "But now we
see things are going back to normal, and that if we can
just be patient and everyone does his part, we'll soon
be getting out of this hole."
Early in the decade, annual inflation here rose to more
than 1,000 percent, with prices and wages pushing each
other up because of just such a policy of indexation.
But the "real plan" that went into effect in 1994
brought that spiral to an end by linking the nation's
currency to the dollar, ending the erosion of salaries
and enabling millions of Brazilians to buy goods on the
installment plan.
"Now that people have tasted what consumerism is, they
don't want to give that up," Paul Bydalek, president of
Atlantic Rating, an economic analysis firm in Rio de
Janeiro. "People want stability."
So despite signs of an upturn, Brazilian consumers
continue to act conservatively, enforcing a discipline
that has imposed itself on other sectors of the
economy.
At the clothing store here where she works, Andrea
Frattini, a 28-year-old sales clerk, has noticed the
difference in spending habits and what she regards as a
new mentality brought on by the crisis.
"We're getting about the same flow of customers, but
people are controlling themselves more and spending
less," she said. "Customers who used to spend 100 reais
are now spending 50 and telling us that they are trying
to avoid a lot of extra expenses."
Mailson da Nobrega, a former finance minister who is
now an economic consultant here, explained the
phenomenon. "The economic retraction has made it
impossible to pass on price increases from the
devaluation," he said.
But just as they argued in January that the situation
here was not as grave as jittery overseas investors
were saying, government leaders now caution against
exaggerated optimism. "The Brazilian situation was
never as bad as it was presented then, and it is not as
good as it is presented now," Cardoso said.
Their most immediate worry is that the Brazilian
Congress will be tempted, as it had done in the recent
past, not to push ahead with what officials and
economists view as long overdue economic and political
changes.
"That's the top concern of everyone," said Arminio
Fraga, a former aide to financier George Soros. Fraga's
installation as president of the central bank in March
was an early turning point in Brazil's battle to regain
investor confidence.
"We run the risk of the government mistaking this truce
as a victory," da Nobrega added. While he sees
short-term stability, he said, the government must
address its historical tendency to spend much more than
it can afford.
After January's currency collapse, both houses of the
Brazilian Congress approved measures they had rejected
in December, giving the government broader powers to
tax pensions and financial transactions to reduce a
yawning budget deficit.
But to retain the credibility his government has
regained in recent weeks, Cardoso aims to persuade
Congress to approve a new fiscal responsibility law
that will make it impossible for states and
municipalities to spend more money than they take in.
Changes aimed at simplifying Brazil's complex and
inefficient tax structure are also part of the IMF
agreement, and must be approved for Brazil to remain in
good standing.
Perhaps even more essential in the long run is a
package of political-law changes that would restrict
the frequency with which legislators can change
parties, limit electoral coalitions, introduce voting
by districts and require parties to obtain 5 percent of
the vote to be represented in Congress.The Brazilian
Congress now has more than 20 parties, and the measure,
if passed, is expected to reduce that number to a more
manageable five or six parties.
Cardoso said he was certain he would obtain passage of
these changes this year. At the moment, however,
congressional attention is focused on a pair of
parliamentary inquiries: one into inefficiency and
corruption in the judicial system and the other into
accusations of insider dealings in the banking system
in the January currency collapse.
The rebellion of Itamar Franco, a former president who
is now governor of the country's second-largest state,
Minas Gerais, against the central government also
continues. Franco, who had introduced the stabilization
program when Cardoso was his finance minister, was a
catalyst for the January crisis by declaring a 90-day
moratorium on debt payments by his state. He recently
extended the policy.
But Cardoso dismissed the continued defiance as
"without consequence," and most political and financial
analysts here agree.
After talks with Cardoso, several other state governors
who had threatened to join Franco have decided against
it, and Cardoso's administration has stepped in to pay
the international obligations of Minas Gerais.
"I give him credit for defusing what was a really
contentious issue," said Frederick Henderson, president
of General Motors of Brazil. "The government has
demonstrated some fairly strong leadership and brought
some order to the subject."
Yet for Cardoso, a sociologist who has written a score
of books, the crisis has been nearly as costly in
political as in economic terms. After being elected by
a wide margin in October to a second term, the first
Brazilian leader in modern times to be able to do so,
his job performance rating has dropped sharply, from 58
percent in December, to a low of 35 percent, according
to the most recent poll.
Still, Cardoso seems more concerned, according to those
who work with him, about leaving a strong and healthy
economy to his successor than in succumbing to populist
measures that might immediately restore his popularity.
"He knows," said Malan, the finance minister, "that he
is deciding the whole of his second term now in these
next few months."
Copyright 1999 The New York Times Company |
