Latin America Looks to Lula

Article excerpt

INVESTORS in Latin America will be looking closely at the make-up of the 51-strong transition team to be announced this week by Brazils president-elect, Luiz Inacio Lula da Silva.

Lula, who swept to power in a landslide victory last week, is this weekend seeking support for his team from other parties, given that his Workers party has only a tiny majority in congress. He is expected to work closely with President Henrique Cardosos outgoing administration to secure a smooth transition until 1 January, when he assumes power.

Much depends on Lulas choice of cabinet and his ability to manage Brazils $260bn debt burden. With Brazils neighbours, Argentina and Uruguay, both under pressure, regional stability appears to rest on his ability to steer clear of the danger of default.

Argentina is on the brink of defaulting on an $800m payment to the World Bank due on 9 November, while squabbles within the Peronist party are jeopardising debt relief negotiations with the International Monetary Fund (IMF).

Meanwhile, the Uruguayan government foundered last week after the National party withdrew support from president Jorge Batlles ruling coalition over his management of the countrys economic crisis.

If Lula fails to meet international obligations, it would send risk premiums soaring throughout Latin America, possibly leading to a chain reaction and to a collapse in both Argentina and Uruguay as international investors gave up on the entire region.

In this forbidding climate, investors in Latin America are now looking to Lula, who polled 61% winning a mandate for change, for decisive action to reduce the danger of a Brazilian debt default.

The Brazilian real remains down 36% against the dollar this year; economic growth forecasts have shrunk to 1.1%; interest rates have risen to 21%; and public debt has reached 60 % of gross domestic product (GDP).

Only about 30% of the debt is in dollars but with roughly 80% of returns on the real-denominated obligations linked to the dollar or domestic interest rates, the servicing costs are rising. Lula needs to find $40bn next year to service external debt u not easy to reconcile with popular demands for increased social spending.

In a conciliatory opening gambit to the markets, Lula last week pledged to meet the existing target of a 3. …