ECONOMY-BRAZIL: Real Rallies, but Turmoil Remains

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 1 2002 (IPS) - Although Brazil’s local currency rallied Thursday after an eight-day slide, the factors triggering the turmoil remain, and the government is negotiating a new agreement with the International Monetary Fund (IMF) to help the country out of its current economic troubles.

The real closed at 3.16 to the dollar Thursday, a major recovery after closing Wednesday at 3.48.

According to market analysts, the attack on the real let up due to the expectations generated by the talks with the IMF being carried out by a mission sent to Washington Tuesday, and because of the easing of the speculative pressure typical of the end of the month, when the exchange rate defines returns on the futures market.

The value of the real plunged 5.5 percent Wednesday, bringing the total depreciation for July to 18.3 percent.

At noon Wednesday, the real had plummeted to a record low of 3.61 against the dollar – despite the Central Bank’s intervention on the exchange market, where it sold 300 million dollars to ease liquidity – after breaking through the psychological barrier of three to the dollar on Jul 25.

The Brazilian economy has felt the impact of the devaluation. Inflation is on the rise again, and it is considered a given that Brazil will not meet the target agreed with the IMF of a maximum rise in the consumer price index of 5.5 percent this year.

Imported wheat covers 75 percent of local consumption, which means the prices of all wheat-based products have gone up. The price of bread, for instance, climbed between 15 and 20 percent.

For months, fuel prices have contributed to driving up inflation, since Brazil does not produce enough oil and gas to cover local demand, and the price of imported fuel closely follows the value of the dollar.

Export companies, which in theory benefit by the slump in the real, are having a hard time arranging sales, due to a lack of credit.

Meanwhile, between 1.5 and 2.0 billion dollars worth of loan payments owed by private companies are falling due every month, and the firms are only able to renegotiate less than half of their debt. As a result, they head to the market to buy dollars, thus contributing to the real’s slide.

The Central Bank injects around 50 million dollars into the market daily, besides refinancing external credit lines. In total, it will have to place 1.84 billion dollars on the market in August, announced the Central Bank director of monetary policy, Luiz Fernando Figueiredo.

The presidential elections coming up on Oct 6 and fears that a left-of-centre candidate will be elected are blamed for much of the recent turbulence, which has been reflected in the heavy demand for dollars and the weakening of the real.

The two front-runners, Luiz Inácio Lula da Silva of the leftist Workers’ Party, and Ciro Gomes of the Labourist Front, are both outspoken critics of IMF prescriptions and the economic policies of President Fernando Henrique Cardoso.

In the latest opinion polls, the ruling coalition candidate, José Serra, had fallen to third place, which would leave him out of the Oct 27 runoff, in which the two leading candidates will dispute the presidency if none of them takes 50 percent of the vote in the first round.

According to the results of the latest survey, Lula has 33 percent ratings and Gomes 28 percent.

Serra was the only candidate to express support for the government’s talks with the IMF, currently being carried out by a mission comprised of senior Finance Ministry officials and the Central Bank director of economic policy, Ilan Goldfajn.

The Cardoso administration is seeking fresh credit, in order to curtail the pressure on the real and on prices until the new government takes office on Jan 1.

The negotiations between Brazil and the IMF in Washington are classified as urgent, since the international lender recesses on Aug 12. But Globo News, a Brazilian newscast, cited a source from the multilateral institution who said the talks would be “protracted and difficult.”

That prospect could heighten the jitters on the Brazilian market. However, the Sao Paulo stock exchange saw a 4.5 percent rise Wednesday and 1.09 percent growth Tuesday. And former economy minister Marcilio Marques Moreira noted that Brazil has survived “worse moments.”