ECONOMY-BRAZIL: Foreign Accounts Dim Hopes for Improvement

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, May 23 2000 (IPS) - Brazil’s foreign accounts have resurfaced as a thorn in the national economy after their marked deterioration in April, adding insult to injury as the country begins to feel the impact of the recent interest rate hike in the United States.

Aprils current account deficit of 3.08 billion dollars, the worst showing since the January 1999 devaluation of the Brazilian real, was a result of rising interest payments on the foreign debt. In annual terms, it reached 23.8 billion dollars, or 4.06 percent of the gross domestic product (GDP).

The convergence of several negative factors renewed market fears about the foreign vulnerability of the Brazilian economy. Rising international interest rates, following the US example, make it difficult for developing countries with economic stability problems, like Brazil, to attract capital.

The impact of reduced foreign investment could be intensified as an indirect consequence of neighbouring Argentinas growing inability to comply with the fiscal goals set in its accords with the International Monetary Fund (IMF).

Any crisis in Argentina, a major Mercosur (Southern Common Market) partner, would drag Brazil down with it, putting off the nations dreams for economic growth indefinitely.

Foreign investments fell to 1.01 billion dollars in April, less than half the previous months total. The drop was far out of the range of normal fluctuations, said the director of the Brazilian Central Banks Economic Departments, Altamir Lopes.

But the trend is toward a reduction in direct foreign investment, following an influx of more than 30 billion dollars last year, which was unprecedented, according to assessments by the Brazilian Society of Transnational Companies and Globalisation Studies (SOBEET).

The organisation predicts a total of 25 billion dollars in foreign investment for this year, falling to 20 billion next year.

Brazil will not be able to count on this as a source to continue financing its overseas financial responsibilities, which rise along with the growing debt, interests and the remittances of profits.

The solution lies in expanding exports in order to push up the trade surplus. To do so, the government set its 2002 export goals at 100 billion dollars, double last years total and an objective the authorities themselves believe is impossible.

Such scepticism is justified by the fact that the devaluation of the real 16 months ago has yet to produce the expected results. Foreign trade officials have already ruled out the possibility of reaching a favourable trade balance of 4.0 billion dollars this year.

From the beginning of the year through last Friday, Brazil had accumulated a trade surplus of 399 million dollars, according to the preliminary figures cited by the Foreign Trade Secretariat û not quite 10 percent of the original goal and the year is nearly half over.

The stagnation of the Latin American economy, the principal market for Brazils industrial products, and low international prices for raw materials have hampered the nations export performance.

The business community wants the government to implement a more aggressive, continuous policy to promote exports, but economists point to the low added value on exportable goods as one of Brazils greatest disadvantages.

The hefty investments that have found their way into Brazil recently, and continue arriving, have not translated into increased export capabilities, as the defenders of foreign capital had announced they would.

The problem is that 80 percent of direct foreign investment from 1995 to 1999 û some 117 billion dollars û was earmarked for services, according to SOBEET. It is a sector that does not export, but instead pours investment into the national market and transfers earnings and dividends overseas.

Future increases in these remittances will mean further pressure on the countrys foreign accounts, acknowledged Francisco Gros, president of the National Economic and Social Development Bank, coinciding with the rising concern among the political oppositions economists.

Large foreign companies operating in Brazil, mostly producers of exportable goods, do not contribute to improving the nations trade balance either. Their imports of raw materials, components, machinery and technology have expanded much more than their exports, according to various studies.

But other factors increase the economic threat and are more serious in the short term than rising interest rates in the United States, says the Central Banks director of Economic Policy, Sergio Werlang.

Increasing oil prices, which last month still represented a hefty portion of Brazils imports, and the devaluation of the euro, which cuts into Brazil s ability to compete in the European Union, its largest foreign market, push trade balance improvements farther out of reach.

The sharp decline in the US stock markets Nasdaq index, which covers the trade activity of high technology firms, as well as rising interest rates also affect the flow of capital, diverting funds away from countries perceived as high risk, like Brazil.

The Sao Paulo stock exchange lost 1.288 billion dollars in foreign investments from January 1 to May 10 û a flight of capital attributed primarily to the instability of the global market.

The Brazilian stock market has also suffered shrinkage as more and more companies are transferring their stocks to Wall Street in the United States, where they are likely to be safer and there are fewer costs.