Magazine article Economic Trends

Brazil's Public-Sector Debt

Magazine article Economic Trends

Brazil's Public-Sector Debt

Article excerpt

[GRAPHICS OMITTED]

NET PUBLIC-SECTOR DEBT, JUNE 2002

Dollar-
linked 42%

External           21%
Domestic           79%

GROSS PUBLIC-SECTOR DEBT, JUNE 2002

General governement assets    $95 billion
Net public-sector debt       $265 billion

Note: Table made from bar graph.

SOURCES: International Monetary Fund; Ilan Goldfajn, "Are There Reasons
to Doubt Fiscal Sustainability in Brazil?" Central Bank of Brazil,
Technical Notes 25 (July 2002); and John Williamson, "Is Brazil Next?"
Institute for International Economics, International Economics Policy
Briefs, no. PB 02-7.

Economic activity in South America remains weak. The immediate prospects depend largely on how Brazil, the region's biggest economy, manages its current public-sector debt problems. A Brazilian default could have major consequences for South America and repercussions for U.S. economic policies.

Brazil's net public-sector debt has burgeoned since 1995. At the end of June 2002, it equaled 58.6% of the country's GDP or roughly $265 billion (equivalent), of which foreign investors held approximately 21%. About 42% of Brazil's net public-sector debt is linked to the U.S. dollar, so that movements in the dollar's exchange rate against the Brazilian real directly affect the real value of the debt.

If the cost of servicing its debt outpaces its ability to raise revenue for that purpose, Brazil's debt-to-GDP ratio will continue to rise. Economists typically measure the costs of servicing debt by a real (or inflation-adjusted) interest rate and use the nation's real GDP growth as a proxy for its ability to service debt. We do not know how real interest rates and Brazil's economic growth will evolve over the coming years, but we can measure the prospects for its debt-to-GDP ratio under a range of possibilities. In the calculations, these values represent 10-year averages, so the exercise permits some variation, provided that any deviations from these values are eventually offset.

While the interest rate and GDP combinations in the table fall within the range of its past year-to-year experience, Brazil's GDP has grown only 2.7% per year on average since 1986, with a range of -0.5% in 1992 to 7.0% in 1986. Similarly, between 1996:IQ and 2001:IVQ, the average annual real interest rate on Brazil's treasury bills equaled 15%, with a median value of 13%. …

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