Magazine article Business Credit

International Insight

Magazine article Business Credit

International Insight

Article excerpt

Hot Spots-Brazil

An unusual phenomenon made its appearance in recent weeks, when short-term Brazilian external bonds began to carry lower yields than similar paper issued by Argentina and Colombia, although the Brazilian IOUs have inferior foreign debt ratings. By charging Brazilian bond issuers less than rating agencies such as Moody's and S&P would indicate, investors seem to be saying that the country is overdue for an upgrade. They have a point in that Brazil is indeed doing very well, internally as well as externally.

The fiscal surplus, so critical to Brazil remaining in the good graces of the IMF and warranting the confidence of international investors, was more than double the target of BRI 7.24 billion set in the accord with the Fund in the first quarter of this year. The annualized rate of inflation for January-May was 3.4 percent, suggesting that the goal of 4.0 percent for all of 2000 remains realistic. Encouraged by the good showing, the Central Bank last month slashed the compulsory deposit rate for commercial banks, enhancing their ability to lend. The GB also cut its key Selic interest rate by 100 basis points to 17.5 percent, letting it be known that its "bias" is to lower rates further.

Just how far interest rates have come down is evident from the fact that the Selic marker stood at 45 percent in March 1999, at the height of the Brazilian currency crisis. The easing of domestic borrowing conditions is all the more important as large Brazilian companies with normally good access to the international markets have been finding themselves squeezed by rising U.S. interest rates and investor concerns about the creditworthiness of Latin American firms in general. Several big Brazilian utilities and firms, including Light Servicios de Electricidade SA and Eletrobras, have had to postpone planned offerings abroad for fear of getting a poor reception.

Reinforcing the impression that it is now in much better control of economic policy than it used to be, the government in May won a critical battle when Congress approved a new minimum wage of BRI 151 a month, rejecting intense pressure for a hike to BRI 177. The fight over the extent of the increase had been dragging on for three months. In the end, President Cardoso won the day by threatening to withdraw all government privileges from allies who voted for the larger increase. The government's victory brought relief to financial markets worried that a generous concession would undermine the fiscal progress that has been made. As many pension payments are linked to the minimum wage, the impact could, indeed, have been drastic.

The foreign trade surplus has been running below official expectations, in part because oil prices have been higher than anticipated and prices for key Brazilian export commodities have not rebounded as quickly as had been hoped. The accumulated black entry for this year through mid-June was USD 657 million, which makes it all but certain that the official target of USD 4-5 billion for 2000 as a whole will not be reached. But this year's result will still be much better than the deficit of USD 1.21 billion incurred in 1999. Moreover, the current account BoP gap narrowed in the year to March 31 to USD 23. …

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