Headline: Brazilian Economy Slows

Source: BBC News, 15 August 2001

URL: http://news.bbc.co.uk/hi/english/business/newsid_1492000/1492788.stm

The Brazilian economy is performing far worse than expected, battered by domestic problems, the Argentine crisis and the US slowdown.

New figures showed that annual gross domestic product (GDP) growth in the second quarter was just 0.79%, way below forecasts of a 3% increase.

In the first quarter, annual growth was 4.28%. Quarter-on-quarter, Brazilian GDP shrank by 0.99% - its first contraction since 1998. Analysts say performance might improve in the rest of the year, however.

Home woes

Two domestic problems lay behind the slowdown. First, interest rates were hiked during the second quarter, in an attempt to stabilise the currency, the real, which had come under attack on the foreign exchange markets.

Finance minister Pedro Malan is pushing a fiscal reform package This helped the real, but also choked off business activity in the second quarter.

Many Brazilian firms have introduced unaccustomed discounts and special offers, in the hope of stimulating sluggish demand.

Second, the government introduced electricity rationing at the beginning of June, after the power sector was hit by shortages. On 13 August, Brazil and Venezuela inaugurated a new high-voltage electricity cable, which aims to help top up Brazil's power market.

Foreign factors

But the country is also at the mercy of external forces.

The economic deceleration in the US, one of Brazil's biggest foreign investors and trade partners, has also put a check on economic activity.

And the continuing international concerns over Argentina's solvency have had a disproportionate effect on Brazil.

Since Argentina's currency, the peso, is not freely traded on the markets, investors have attacked the real as a proxy. They have also heavily sold down the Brazilian stock market, the biggest and most liquid in Latin America.

The Argentine crisis has raised renewed fears of emerging-market "contagion", where investor panic spreads unchecked from country to country.

Signs of hope

The outlook for the rest of this year is not quite so gloomy. At the beginning of August, the government introduced a swathe of fiscal reforms in order to win a $15bn aid package from the International Monetary Fund (IMF).

If, as many hope, the IMF also provides emergency aid to Argentina, the current emerging-market gloom might lighten. In time, this might allow a judicious lowering of interest rates.

Most economists now say that the Brazilian economy will grow by 1-1.5% in 2001, below previous expectations but substantially above current growth levels.

Finance minister Pedro Malan used a year-end growth target of 2.7-2.8% when drawing up the IMF-mandated fiscal package.

-- Andre Weltman (aweltman@state.pa.us), August 15, 2001