(Fwd) [listageografia] Brazil: Latin America’s Largest Economy in trouble

Nestor Miguel Gorojovsky gorojovsky at arnet.com.ar
Mon May 21 07:24:53 MDT 2001

[ 8 day delay ]

Stratfor on Brazilian economic problems
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                        Largest Economy in Trouble 

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Brazil: Latin America's Largest Economy in Trouble 
                 2220 GMT, 010511

(Acesso restrito)


The economy of South America's largest nation, Brazil, will slow
sharply in 2001-2002 due to a domestic energy shortage and the impacts
of Argentina's financial crisis. Government-mandated cuts in power
consumption will have a disproportionate impact on Brazil's industrial
sector.  Slower growth, shrinking foreign investment and growing debt
will converge in a financial crisis, most likely early next year.


President Fernando Henrique Cardoso will enact measures June 1 to
reduce Brazil's electricity consumption by 20 percent this year in
order to limit the risk of widespread blackouts in 2002. Cardoso is
sacrificing economic growth for political leverage in 2002, when
Brazilians will elect a new president.  Cardoso cannot be re-elected,
but he wants to be a kingmaker and keep the coalition he leads in
power.  Cardoso, however, is gambling dangerously with Brazil's
economic stability.

Power rationing will shave up to 1.5 percent off the economy's growth
this year, according to the Getulio Vargas Foundation in Sao
Paulo. The Argentine financial crisis may reduce Brazil's economic
growth by an additional 1 percent.  As a result, Brazilian economists
have scaled back their growth forecasts for this year, from 4.5
percent to about 2.5 percent. However, even this revised forecast may
prove overly optimistic.

The impact of the government-mandated reductions will fall
disproportionately on Brazil's industrial sector, which must cut
consumption by 15 percent. The government will aggravate the impact by
not disclosing the dates, times, and locations of rolling blackouts in
order to guard against looting and rioting by poor Brazilians. As a
result, industrial firms will not be able to plan production around
the scheduled power outages, and many will have to shut down and lay
off thousands of workers.

Exports will fall as power-intensive industries, such as automobile
manufacturing and aluminum smelting, are forced to reduce
production. Fiat Brazil, which exports 90,000 autos annually to
Europe, has already announced lower exports this year. Less industrial
production also means lower tax revenues, higher inflation, rising
unemployment and a bigger current account deficit as exports drop and
imports rise to offset declines in local production.

Complicating matters, foreign direct investment this year will slow to
about $20 billion, compared with nearly $30 billion in 2000.

Brazil's net foreign debt, which is its overseas dollar debt minus
assets abroad, was $405 billion in December 2000, according to the
Brazilian society for studies of Transnational Business and Economic
Globalization in Sao Paulo. This amount included $231 billion of
foreign debt, $147 billion of FDI stock in Brazil and $27 billion of
portfolio investment stock.

According to Fitch, an international rating agency, the Brazilian
government's consolidated foreign debt in 2000 represented over 60
percent of gross domestic product. Moreover, 51 percent of the
government's consolidated foreign debt was tied to overnight interest
rates, 24 percent to the U.S.  dollar/Brazilian Real exchange rate,
and 40 percent was due within one year.

The combination of lower export and tax revenues, falling FDI and a
bigger current account deficit could have ominous implications for
Brazil's ability to service its foreign debts this year. Brazil has an
external debt-servicing requirement of $55 billion this year and will
have to borrow what it cannot raise through exports and taxes.
Borrowing costs will be high due to increased worries about the
financial and political stability of both Brazil and Argentina.

Investors watching Brazil have several concerns. The first is the
Cardoso government's political stability and the continuity of its
free-market policies after next year's presidential election. No clear
candidates have yet emerged, but meanwhile a $2 billion embezzlement
scandal in which several of Cardoso's closest aides have been
implicated has damaged his credibility. Two Cabinet ministers have
resigned, and Congress has created a committee to investigate 19
corruption cases. The political opposition in Congress is already
exploiting Cardoso's weakening political base to demand that the
government restructure Brazil's foreign debt to free up funds for
increased social spending.

A second concern investors have is the duration and severity of
Brazil's electricity shortage. The Cardoso government blames the
shortage on insufficient rainfall over the last three years.  Rainfall
levels are running 30 percent below normal in the Southeast and 50
percent below normal in Northeast Brazil. As a result, reservoir
levels are well below 50 percent of capacity for this time a
year. Brazil derives over 80 percent of its electricity needs from

Since 1995, however, the Cardoso government has not done enough to
encourage private investment in new power generating
capacity. Industrial demand for electricity has grown 10 percent
annually since 1995.  Overall national demand for electricity during
this period grew by 4.4 percent a year, but generating capacity
increased only 3.4 percent annually.  Growth in new generating
capacity has lagged the rest of the Brazilian economy, because the
government refused to sell state-owned generating companies and
delayed needed tax and regulatory reforms.  Now Brazil is paying the
price with a structural power shortage that could last until 2003 or

A third concern investors have with regard to Brazil is Argentina. A
default by Argentina will trigger a financial crisis in Brazil.  Fears
of an imminent default have eased temporarily as Argentina's Economy
Minister Domingo Cavallo pushes forward with plans to swap up to $30
billion of short-term debt for up to 30 years. Argentina, however, has
merely postponed the moment when it will have to seek a forced debt
restructuring. If Argentina's economy does not start growing again in
the next three to six months, it will default and drag down Brazil.

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Néstor Miguel Gorojovsky
gorojovsky at arnet.com.ar

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