ECONOMY-BRAZIL: Hovering Clouds May Ruin the Parade

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 12 2000 (IPS) - Brazil continues to accumulate good economic news, boosting the outlook for growth and improving its international image, but it still faces challenges, including an inflationary turnaround in July and a judicial dispute that could mean a sharp blow to public accounts.

In an operation that was more successful than expected, Brazil exchanged 5.22 billion dollars of its foreign debt in Brady bonds on Thursday for new 40-year debt titles, reflecting a strong recovery in confidence among foreign investors.

The move allows the country to reduce its vulnerability to international financial crisis, save nearly one billion dollars in interest over the next 10 years and free up 312 million dollars that were being held in guarantee and will now be included in September’s currency reserves.

The largest undertaking of this type by a developing country coincided with the announcement that Brazil’s gross domestic product (GDP) grew 3.84 percent in the first half of this year, surpassing all expectations.

Another encouraging economic factor was the sale of 14.5 percent of the shares in the state-run oil giant, Petrobrás, finalised Wednesday. It is part of the company’s “surplus” capital, that is, the portions leftover while still maintaining the government as majority owner.

The sale, begun in July, gave Brazilian workers the chance to buy shares with part of their retirement funds, known as a “popular privatisation” because it distributes stocks among small investors.

The model had already been established for the privatisation of the state enterprise Furnas, Brazil’s largest electricity producer.

It was “an emblematic operation” because individual Brazilian investors participated in a business deal that involves enormous sums of money, said Francisco Gros, president of the National Bank of Economic and Social Development, the institution that co- ordinates the country’s privatisation programme.

Of the income collected from the sale – some 4.04 billion dollars -, 2.6 billion came from foreign investors and will also serve to expand Brazil’s currency reserves by 10 percent when combined with funds from the exchange of foreign debt titles.

But Brazil is still paying the residue costs for the high inflation that dominated its economy until 1994, which include the continued threats to economic stability.

July’s inflation, according to the Expanded Consumer Price Index adopted in agreements with the International Monetary Fund (IMF), grew to 1.61 percent, the highest monthly rate in five years. It nearly topped the accumulated inflation of the first six months of this year, which was 1.64 percent.

This turnabout had been expected and will not affect the goal of maintaining the inflation rate this year at around six percent, affirmed Daniel Gleizer, international affairs director at Brazil’s Central Bank.

But in a country where memories of rampant inflation are still fresh, the fear of its return is ever-present.

Nervousness continues because the July rise was due mostly to the fuel, telecommunications and energy sectors, which are under a certain amount of government control, and because they have repercussions in other economic areas.

The greatest threat to the potential economic bonanza lies in a Federal Superior Court case that could cost the government 38 billion ‘reais’ (21 billion dollars), pushing up public debt and the interest Brazil would have to pay in order to refinance it overseas, with the country then considered a higher financial risk.

The case originates in two anti-inflation plans adopted in 1989 and 1990 when the governments in power replaced the national currency and the correction indices.

Nearly 600,000 cases were brought before the courts by labour unions other workers’ groups, representing some six million wage earners. They want compensation for the losses they claim to have suffered under the Security Fund for Time of Service, made up of monies deposited in their names by employers, the equivalent of a year’s wages.

The government’s inflation-fighting plans meant that the funds were not corrected in line with the inflation index, but at a lower rate. The difference, accumulated in the 11 years since, would total in the billions, ultimately taking its toll on the public debt.

The final ruling awaits the conclusion of the judges’ vote, which was halted Thursday. But seven of the 11 Supreme Court justices have already voted, virtually insuring that the government has lost.

Economists calculate the total compensation to range from 2.15 to 38.80 billion reais (1.2 to 21.50 billion dollars), depending on the details of the final ruling.

The government will attempt to prove that, because it involves a debt of the State, the time period for filing a petitioning was five years, which have already passed, and thus there can be no new lawsuits.

It could also postpone for many years the implementation of the ruling and payments, doing so through debt titles. In any case, because such large amounts of money are at stake and could drive up the public debt by eight percent, the case will continue to feed economic uncertainty.