Wall Street begins to worry about slide in Brazil

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Published Thursday, June 14, 2001

Wall Street begins to worry about slide in Brazil

While the war in Colombia and corruption scandals in Argentina, Peru and Venezuela are capturing the headlines from Latin America, Wall Street economists are worrying about the possibility of a serious economic slide in the region's biggest country -- Brazil.

Brazil's economy, which grew by a strong 6.7 percent in the first half of this year, has suddenly been hard hit by the worst energy crisis in the country's history, as well as by a drop in foreign investments, a weakening of the currency, and growing political uncertainty.

Under drastic government-ordered energy rationing measures, factories have cut by up to 25 percent their working hours, and luxury hotels in Rio de Janeiro have turned off most of their lights. In what was unthinkable in one of the world's most soccer-crazy countries, even nighttime soccer games have been suspended at the biggest stadiums.

With factories working at a slower pace, production is bound to drop. While the Brazilian government had forecast earlier this year a 4.5 percent economic growth for 2001, officials are now projecting a 3 percent growth rate.

``Compared to the expectations at the beginning of the year, it will be a significant downturn,'' says Paulo Leme, managing director for economic research with Goldman Sachs in New York. ``We are estimating a 2.5 percent growth rate this year.''

The energy crisis has turned into a political nightmare for the government of President Fernando Henrique Cardoso, because Brazilian experts had seen it coming for the past four years.

Government officials had assumed that Brazil, which relies on hydroelectric power for the bulk of its energy needs, would be able to meet its energy demands with normal rainfalls in March and April. But it hardly rained, and a severe drought has drained major lakes.

To make things worse, the drought has especially affected Brazil's central and northern regions, where the biggest cities -- such as Sao Paulo and Rio de Janeiro -- are located. Nighttime blackouts in the big cities have infuriated residents, who fear a big rise in crime.

Cardoso has been especially hurt, because his government enjoyed a reputation of being efficient. Now, critics argue that it didn't act quickly enough to avert a crisis that had been anticipated by many, and the president's popularity has plummeted.

At the same time, Cardoso's ruling coalition has split, and it is not clear whether there will be a strong center-right candidate for the October 2002 elections.

One of the worst nightmares for Wall Street economists is that the widely expected second round of the presidential elections will pit leftist candidate Luiz Inacio ``Lula'' Da Silva and populist former President Itamar Franco.

``Wall Street is very concerned,'' Paulo Vieira da Cunha, senior Latin American economist at Lehman Brothers in New York, told me Wednesday.

``The view of the political outcome is increasingly negative.''

Kenneth Maxwell, director of Latin American affairs with the New York-based Council on Foreign Relations, says that if these crises go on, Cardoso will have very little power to influence who his successor will be.

``Therefore, there will be questions whether the free market reform agenda that this government has pursued will continue,'' Maxwell said. ``This is what worries investors the most.''

On the positive side, most of the Wall Street analysts I talked to say that Brazil faces no problems paying its foreign debts, and some note that the country has a history of producing successful pro-free market presidential candidates at the last minute.

But we will have to watch Brazil closely. An economic crisis or a regression to populism by Latin America's biggest country could have a greater impact on the rest of Latin America than any of today's headlines from the region.

http://www.miami.com/herald/content/news/columnists/oppen/digdocs/080940.htm

-- Martin Thompson (mthom1927@aol.com), June 16, 2001


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