ECONOMY-BRAZIL: Analysts Caution Against Excessive Optimism

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Apr 1 1999 (IPS) - The problem now faced by the Brazilian economy is excessive optimism, warn local authorities and analysts, who say the risks continue despite the rebound of the real and the stock market and the drop in inflation seen last month.

The local currency, the real, rose 16.6 percent against the dollar last month, the Sao Paulo stock exchange gained 20.04 percentage points, and Central Bank interest rates dropped from 45 to 41.95 percent and remain on a downward trend, accompanying inflation.

The real’s recovery indicates that the worst is over, after the wild swings that followed the modification of Brazil’s exchange rate policy on Jan 13 and the currency’s flotation a few days later.

The current exchange rate, 1.72 reals to the dollar, is close to the year-end target – 1.70 – laid out in the latest agreement with the International Monetary Fund (IMF).

Forecasts of continued economic recession for Latin America’s giant – the world’s eighth largest economy – are now being revised.

Former Central Bank president Francisco Gros, now the U.S. Morgan Stanley investment bank’s director for Latin America, believes Gross National Product could fall just two percent this year, half of the contraction previously predicted by the government and independent economic analysts.

But Gros warns that exaggerated optimism could throw everything off track.

The international crisis has not yet become a thing of the past, he points out, and Brazil will suffer its effects if it fails to rigorously implement the fiscal adjustment measures agreed as part of the IMF bail-out, because investors have not yet recovered their confidence in the local economy.

There are also internal risks. Finance Minister Pedro Malan and several local business leaders fear the turmoil that could be caused by a parliamentary investigation commission proposed by a majority in the Senate to probe alleged irregularities in the financial system.

Persistent rumours about Malan’s possible resignation and speculation on who might replace him also indicate that stability remains a far-off goal.

Malan and Central Bank president Arminio Fraga reiterated that there is still much to be done, and cautioned against an easing of the austerity measures.

But the good news has poured in over the past few weeks, leading to a fall in the interest rate on the futures market, to 36 percent in May and less than 32 percent in June. If the rate does indeed drop, public accounts will improve, the recession will let up, and unemployment should dip.

At this point, the value of the real is 42.4 percent down from the Jan 13 rate, after plunging to 70.8 percent down from that level in late February.

The situation has taken a radical turn. The Central Bank has bought up dollars in the past five days, bolstering its reserves. The intervention was designed to keep the real from rebounding too sharply.

The Central Bank is in a comfortable position, if its reserves are compared with the three billion dollars that it can sell – according to the agreement with the IMF – on the exchange market, Fraga underlined.

Inflation, a critical factor and a priority of the stabilisation programme, began to dip in March, giving the lie to pessimistic forecasts. The index used by the financial market dropped from 3.61 percent in February to 2.84 percent in March.

Consumer prices will not be affected by the sharp rise in wholesale prices seen over the past two months, which eliminates the need for high interest rates to curb inflation, according to experts.

The Sao Paulo stock market accumulated a 20.04 percent rise last month – slightly less than the 20.45 percent gain registered in January, which took place, however, against a very different backdrop.

The rally in the value of shares in March paralleled the recovery of the real. In other words, gains measured in dollars nearly doubled those seen in January, when the rise on the stock exchange failed to offset even one-third of the real’s plunge.

Since January, the Rio de Janeiro and Sao Paulo stock markets have rallied around 58 percent, outstripping the devaluation of the real, which demonstrates the return of foreign investors.

The continued availability of commercial and inter-bank loans, a triumph chalked up by the efforts of Malan and Fraga vis-a-vis the major financial markets, has contributed to the newfound optimism.

The credit flow will boost exports, which have fallen in the past three months despite the devaluation of the real.