Headline: Feeling the American Aftershock in Brazil

Source: New York Times, 18 September 2001

URL: http://www.nytimes.com/2001/09/18/business/worldbusiness/18BRAZ.html

SÃO PAULO, Brazil, Sept. 17 — After months of economic crisis had given way to a few weeks of relative calm, last Tuesday's terrorist attacks on the United States threaten to send South America's two largest economies, Argentina and Brazil, into a steep downward spiral.

The two are in difficult straits for very different reasons — a long slump and thorny debt and fiscal problems in Argentina, an energy crisis and eroding confidence in Brazil — but their fates are inevitably intertwined. And analysts said one thing they have in common — heavy reliance on foreign cash — makes them especially vulnerable to the economic aftershocks of the attacks.

"The situation just became much more complicated," said José de Faria, chief economist at Deutsche Bank in São Paulo. "With the flow of foreign investment bound to be significantly weakened, the major concern right now will be how to fund the current account deficits."

Foreign investors have become very skittish. When Telefónica Móviles of Spain said it would abandon its $875 million plan to buy out other investors in Celular CRT Participacoes, a mobile phone company in Southern Brazil, because of "the exceptional events of recent days," CRT's stock plummeted more than 60 percent on the news.

Remarkably, after being beaten down hard last week while United States markets were closed, both the Argentine and Brazilian markets rebounded today while Wall Street was sinking fast. In São Paulo, the benchmark Bovespa index, which fell 18.1 percent last week, gained 5.1 percent today, though it was still off nearly a third for the year — and about half in dollar terms. In Buenos Aires, the Merval index managed a 1.5 percent gain today after falling 4.1 percent last week; it, too, was off about a third for the year, both in local currency and in dollars.

Analysts said one reason the indexes did not fall further in today's downdraft from Wall Street was that months of economic crisis already dried up most of the liquidity in the markets, especially in Argentina. Few people want to buy or sell.

After three years of recession, Argentina came near to defaulting on $130 billion in debt this year. An $8 billion credit line from the International Monetary Fund and the Argentine government's "zero deficit" pledge to live within its means had calmed investors and bank customers in recent weeks.

In a sign that confidence was returning, the rate of withdrawals from banks stabilized in the first weeks of September, after Argentines pulled out 11.6 percent of their deposits in August in fear of a devaluation of the peso. Economists say withdrawals may now pick up again. "The critical issue will be how the reactions of investors will reverberate, in the sense of confidence within Argentina itself," said David Roberts, senior international economist at Banc of America Securities.

With a debt plan in place that puts off most of its debt payments until 2003, the greatest challenge for Argentina will be to stick to fiscal discipline and avoid deficit spending at a time when exports and the economy at large are likely to contract rather than grow. The government is debating a politically volatile proposal for $6.4 billion in spending cuts in the 2002 budget.

Brazil's economy is still growing, though much more slowly now than earlier in the year. Forecasts of robust 4.5 percent growth in 2001 have been halved, as investors recoil from the threat of an Argentine default and the severe electricity shortage and power rationing in Brazil. Brazil needs $25 billion to $30 billion in new foreign investment each year to offset a chronic current-account deficit; concerns that investment will fall far short this year have driven Brazil's currency, the real, down more than 25 percent since January, fueling inflation.

After warning that Brazil would not escape the global economic fallout from last Tuesday's attacks, the president, Fernando Henrique Cardoso, told the nation, "Whatever needs to be done to maintain the rhythm of our normal activities, with economic growth, we will do it."

But to keep inflation from growing out of hand, the country will probably have to aggravate its own recession, by cutting spending sharply and tightening monetary policy when most countries are loosening.

The Brazilian government had hoped to offset a drop in foreign investment by increasing exports, a plan that Mr. Cardoso recently introduced under the proclamation "export or die."

But even with the real devalued steeply, experts are skeptical that the country will find any traction for stepping up exports when the world economy is slowing down and growing more uncertain. "Exporters, particularly those that are branches of multinational companies, have to know that exports from Brazil are going to be competitive over a long period of time," said Gilberto Dupas of the University of São Paulo.

The United States is the largest importer of 7 of Brazil's top 12 export products, accounting for $50 million to $60 million of trade a day. But in many of those categories, including shoes, cellphones and auto parts, demand from America is expected to drop almost immediately.

Brazil's largest single exporter, Empresa Brasileira de Aeronáutica, known as Embraer, may be one of the hardest hit, because severely cash-squeezed airlines are expected to start canceling orders for its passenger jets. Some analysts said Embraer's order book may shrink a third, to 150 planes from 220, aggravating Brazil's trade deficit of nearly $1 billion.

Experts see some hope that global commodity prices may rise in the event of a protracted American military response to the terrorist attacks, though that effect would take a while to kick in. And they said that in Brazil at least, the falling currency and slowing economic growth might hold down imports and help limit the damage to the trade deficit.

While the scope of the eventual American response to the terrorist attacks cannot yet be known, experts say one thing is clear: the difficulties of emerging markets like Argentina and Brazil, however acute, have now slipped a long way down the global priorities list.

-- Andre Weltman (aweltman@state.pa.us), September 18, 2001

Answers

Its not going to slip a long way down the global priority list if one of them collapses.

-- Guy Daley (guydaley1@netzero.net), September 18, 2001.