The Real Deal

Article excerpt

After months of promising not to devalue the Brazilian REAL, the government did just that in mid-January. Although the Central Bank's decision sent shock waves through the markets, it's important to maintain a long-term perspective on Brazil. Shocked by the fall in the currency, the Brazilian Congress passed a series of fiscal measures that had been submitted for consideration at the end of 1998.

Approval came late, but the legislation will have a positive impact on the government's ongoing effort to reduce its deficits. The targets set by the government of Fernando Henrique Cardoso in November 1998, when the $45.1 billion package was approved by the International Monetary Fund (IMF), were generally met by February 1999. While the markets may require further fiscal action by the government, that can only be in Brazil's long-term interest. There's a broad consensus in the Cardoso second administration that further fiscal cuts will be needed in the future.

The government plans to privatize Eletrobras, the government's giant electricity holding company this summer. The Eletrobras transactions-nine operating units will be created out of the existing three main generating assets-are seen as a opportunity to buy into a rapidly growing sector. As one investment banker responding to the announcement put it: "These are fantastic assets and they will be sold whatever happens." There's talk in Brasilia that other state companies-perhaps Petrobras, the state petroleum company or the Banco do Brasil-will also be sold, both to generate revenue and to convince the markets that the government is serious. Brazil desperately needs major investment in electricity to keep up with rapidly growing demand. While demand may stagnate as the monetary authorities work through the postdevaluation process, Brazil remains an attractive consumer market in the long term.

But there's a sharp downside to the devaluation. Steven P. Bruce, a trader at the volatile Chicago Board of Trade, commented that all commodity prices have been slipping and as a result of the devaluation, "we will sell less wheat to Brazil and they will compete with us on soybeans; it's that simple."

The impact will be felt in those states that have been increasing their export to Latin America generally, and specifically to Brazil. Florida is a prime example. Alessandro Carraro, president and chief executive of trading company American Gateway International in Miami, stated that "in the short term, it's all terrible for us here. …