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Brazil: Tight Money Strangles a Recovery


South American giant Brazil has stumbled into recession, its second in four years. Real gross domestic product fell 0.7% in the first quarter, after a similar decline in the fourth quarter.

Despite the back-to-back drops, analysts expect a second-half rebound, and for all of 2002, real GDP could grow 2.3%. Right now, though, high interest rates are pummeling commercial lending, construction activity, and manufacturing. Power rationing has stalled energy output, and unemployment in S?o Paulo tops 20%.

High borrowing costs are the result of tight monetary policy as well as fears about the future of outgoing President Fernando Henrique Cardoso's market-friendly reforms. Luiz In?cio "Lula" da Silva is the front-runner in the October presidential election, and the leftist candidate has said in the past that Brazil should stop payment on its foreign debt. Recently, Lula has moved closer to the political center, but investors fear the former labor leader's restraint may be mere electioneering.

Although Brazil's woes are mostly homegrown, the prolonged inertia in crisis-ridden Argentina has compounded the problems. Brazil's austere fiscal policy is hardly comparable to Argentina's reckless one. But investors have pushed yields on Brazil's publicly traded debt to levels unseen since October when the Argentine crisis flared up (chart). The bulk of this debt, which equals 55% of GDP, must be rolled over in the next 12 to 15 months. The real has slid to 16% against the U.S. dollar in two months. And foreign direct investment will likely fall to $16 billion this year from a 2001 total of $20 billion.

In addition, the International Monetary Fund has renewed talks over Brazil's loan package. Such concern is a sharp turnaround for the IMF: As recently as May 7, IMF Deputy Director Anne Kreuger said Brazil wasn't anywhere on the IMF's radar screen. But signs of recession and a weakening currency have seemingly shifted that view. By James C. Cooper & Kathleen Madigan

By Joshua Goodman in Buenos Aires


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