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

To: Steve Fancy who wrote (15317)	5/17/1999 8:29:00 AM
From: wl9839	Read Replies (1) \| Respond to of 22640

Brazil Rides Recovery Wave Though Bulging Deficit Remains Brasilia, May 17 (Bloomberg) -- The wave of momentum that Brazil is riding with capital flowing back in, interest rates falling and inflation slowing doesn't erase one lingering problem: the country's budget deficit. Though the deficit slipped 9 percent in March over the previous month, it remains at 120 billion reais ($73 billion), equal to 12.3 percent of gross domestic product -- one of the highest in the world. To make matters worse, the U.S. reported Friday that the inflation rate surged at its fastest pace in nearly a decade in April, heightening concern that the Federal Reserve might raise interest rates. That is just the scenario -- a stubbornly high deficit in Brazil and tighter credit in global capital markets -- that could break the country's momentum. ''There are reasons to be optimistic, but let's not go crazy,'' said Scott Grimberg, an emerging markets strategist at Miller Tabak Hirsch & Co. ''Brazil's got a lot of issues yet to settle.'' Still, last week was filled with good economic news for Brazil. The government reported the economy grew 1 percent in the first quarter over the fourth quarter of 1998, defying more pessimistic forecasts. The central bank slashed interest rates for the sixth time in seven weeks, and signaled more cuts are on the way, possibly this week. The pace of inflation slowed. Central bank president Arminio Fraga said Brazil may not need to draw on the remainder of a $41.5 billion aid package from the International Monetary Fund because the country doesn't need the money. If anything, Brazil's challenge now is to not get complacent; to keep spending in check and tackle the long- standing proposals to reform the pension and tax systems to keep the budget deficit at a more reasonable level. Both President Fernando Henrique Cardoso and Fraga said that last week. ''The number one risk to our program is ourselves. We have to stick to our program -- both fiscally and monetarily,'' Fraga said in an interview. Tumble Brazilian officials got a look Friday at just how quickly capital flows can reverse. After the U.S. released its inflation data in the morning, nervous investors dumped stocks and bonds in Brazil and throughout the world. Losses on the day for Brazil's C-bond, the most actively traded bond in the emerging markets tumbled 3.6 percent, compared with a 1.3 percent slide for all emerging market debt, as measured by J.P. Morgan & Co. Brazil's benchmark stock index also fell Friday, posting its third loss in four days. Still, most investors remained focus on the momentum Brazil has generated since the panic-filled days surrounding January's currency devaluation. And not without reason. All three main consumer price indexes reported slowing inflation. One index, the government statistics agency IBGE, had the annualized inflation rate tumbling to 6 percent in April from 16 percent in March. And with inflation slowing, the central bank cut its benchmark overnight interest rate for a sixth time in seven weeks to 27 percent in a bid to both lower debt costs and pull the economy out of recession. The reduced rates and improved outlook is opening foreign debt markets for Brazilian companies and banks for the first time since the devaluation. Petroleo Brasileiro SA, Brazil's largest company, sold $100 million in debt, joining banks such as Banco Bradesco SA selling debt abroad. Last week also provided signs that the slowdown isn't as severe as anticipated. The government said that the economy posted 1 percent growth in the first quarter compared to the fourth, defying analyst expectations of a devaluation-caused tumble in output. The growth follows two quarters of declines, suggesting even the IMF estimate of a 2.5 percent decline in the economy may be too pessimistic. The GDP number got Chip Brown's attention. Within 24 hours, the Morgan Stanley Dean Witter economist put out a note to clients saying he may bump up his 1999 GDP forecast of a 0.8 percent contraction. ''The evidence of mild recession suggests that we may need to revise our forecasts adding more growth and a speedier recovery,'' he said in the report. Cut Wednesday? And more good news is expected for next week. Fraga is expected to cut rates again at Wednesday's monetary policy meeting. Analysts expect the 41-year-old former fund manager for financier George Soros -- whose appointment in February has been a key cause of the turnaround -- could cut to as low as 23 percent. The rate stood as high as 45 percent in March. The current interest rate ''won't be around for long,'' Luis Fernando Figuieredo, monetary policy director at the central bank, said last week. The concern is that as interest rates fall, reducing the government's borrowing costs, the will to trim to deficit will diminish. If spending cuts were not implemented and rates increased again, the deficit could well spin out of control again. ''We are well aware of the need to keep up the pace of reforms,'' said Cardoso last week in a speech to the U.S. chamber of commerce in Washington. ''There is no danger of any kind of misplaced euphoria within the government. That may be easier said than done, analysts said, as the government has still to bail out Brazil's states, which owe some 100 billion reais in debts. ''The hardest cuts are still to come - the ones that need political consensus,'' said Grimberg. ''Any sudden problem or political surprise could upset what's been quite a positive story.'' ------------------------------------------------------------------------ © Copyright 1999, Bloomberg L.P. All Rights Reserved.