ECONOMY-BRAZIL: Relief over IMF Bail-out

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 9 2002 (IPS) - Brazil received the news of the International Monetary Fund’s (IMF) new 30 billion dollar aid package with a sigh of relief and signals of confidence in the economy Thursday.

Brazil’s hopes for a loan were surpassed by the size of the bail-out, which will be disbursed over the next 15 months, and by the IMF’s unexpected flexibility with respect to targets for inflation and foreign reserves.

The financial market responded positively. The local currency, the real, closed Thursday at 2.91 to the dollar, shortly after its value plunged to a record low of 3.61 on Jul 31, after which it recovered due to expectations that an agreement would be reached with the IMF.

Currency traders said the value of the real should continue to rally, to 2.80 against the dollar.

The country risk rating, which measures investors’ perceptions of the capacity to meet debt payments, dropped below 1,800, after climbing to 2,307 last week.

The 4.53 percent rise in the Sao Paulo stock exchange and the appreciation of foreign debt bonds Thursday also reflected renewed confidence in the Brazilian economy.

The agreement turned out “better than what the market expected,” said the president of the Commercial Association of Sao Paulo, Alencar Bruti.

The IMF agreed to a minimum level of foreign reserves of five billion dollars, which will make an additional 10 billion dollars available to the Central Bank, to allow it to intervene on the foreign exchange market and ensure the stability of the real, besides the six billion dollars that the Fund is to release this year.

The inflationary target of 3.5 percent this year and 4.0 percent for 2003 will now be fixed on a quarterly basis, at an annualised eight percent for the present quarter, and 6.5, 6.0, 5.5 and 5.0 percent for the next four quarters, said Central Bank president Arminio Fraga.

“Such a bulky loan” to an outgoing government entails a new show of “confidence in the country itself, not just in the government,” said President Fernando Henrique Cardoso, who described the new funds as “oxygen” for the economy, and a blow to speculators.

The IMF did not demand any formal commitment by the candidates running in the October presidential elections. Their statements of support for the negotiations with the multilateral lending institution and their pledge to adhere to fiscal austerity were seen as sufficient, said Finance Minister Pedro Malán.

However, the commitment to maintaining a budget deficit amounting to 3..75 percent of gross domestic product (GPD) over the next three years was criticised by economists belonging to poll favourite Luiz Inacio Lula da Silva’s leftist Workers’ Party (PT).

The presidential candidates agreed to that goal – which is already included in the budget – for next year, but were surprised that the target was extended to the following two years as well, even beyond the timeframe encompassed by the new accord with the IMF.

Such strict fiscal austerity will limit the country’s social investment capacity and its ability to restart economic growth, said Guido Mantega, one of the PT’s leading economists.

But according to Malán, that target arose from the need to prevent an increase in the public debt in relation to GDP which, he stressed, is indispensable for maintaining economic stability.

For Lula, the agreement was “inevitable” given the crisis that he said was provoked by the Cardoso administration. The requirement of a budget surplus will impose restrictions on the next government, and the best way to overcome those limitations is by modifying economic policy, promoting growth and reducing interest rates, he said.

Another opposition candidate, socialist Anthony Garotinho, who is fourth in the polls, expressed concern over the low level of reserves that will be left in the state coffers when the new administration is inaugurated on Jan 1, which he said would bring the new government “to its knees” before the IMF.

But nearly all of the candidates to succeed Cardoso, who has been in office since 1995, as well as business leaders stressed that the IMF aid package would bring tranquillity to the financial market, the electoral process and the transition period.

However, it will not resolve the “structural problems” of the national economy, which remains highly dependent on foreign capital, said Garotinho and Mauro Benevides, economic adviser to Ciro Gomes, the centre-left candidate of the Labourist Front, who is just behind Lula in the polls.

This is the third time in the past four years that the country has had to turn to the IMF – a sign of “undesireable vulnerability,” said Benevides.

In 1998, the IMF granted Brazil an 18 billion dollar financial aid package, when the country was suffering even greater capital flight than is currently being experienced. An additional 23.5 billion dollars in loans was also provided by multilateral banks and the governments of wealthy nations.

Ruling coalition candidate, social democrat José Serra, expressed unconditional support for the agreement with the IMF, saying it did not represent “any additional sacrifice” for society, nor an increase in foreign debt, but a refinancing that would make debt servicing easier and less costly.

Despite the renewed confidence, the Oct 6 presidential elections – which could lead to an Oct 27 runoff if no candidate wins 50 percent of the votes – will continue fuelling market jitters, say analysts.