Recovery underway in Brazil

Brazil, the Latin American powerhouse, is climbing out of the trough it was left in by the recent series of emerging markets crises.

The last quarter of 1999 saw a real turnaround in the region, pushing growth estimates upwards and exciting the interest of international investors.

Caspar Romer, senior fund manager at Foreign and Colonial Emerging Markets, says: "The initial expectation for 1999-2000 was that the region was going to suffer an apocalyptic collapse, possibly a return to hyperinflation and a complete withdrawal of capital from the region. The spillover would then cause a regionwide slowdown. But the outcome has been much better than expected."

Brazil's GDP was estimated to stay flat in 1999 and to rise to 3% or 4% in 2000. The IMF, which has secured a $42bn aid package in case Brazil needs to prop up its currency, has set inflation targets at 8% in 1999 and 6% this year, with a 200 basis point margin for error.

Fiscal accounts were a key cause for concern over the last 12 months. Brazil's primary surplus amounts to 3.1% of GDP, which should rise to 3.25% next year, according to Romer. Lowering interest rates should also push domestic investors into equities, especially pension fund managers and other institutional investors.

Katie Lundy, investment manager at Stewart Ivory, recognises the recovery, but is more cautious. She says: "The commodity price increase is a positive but the current account deficit for the whole region is 3.5%, so it is reliant on positive global credit conditions."

Among emerging markets, she finds the recovering Asian economies are more attractive because they generally have healthier current accounts.

There are also some country-specific problems. The government-run social security system in Brazil has attracted criticism for making large payouts to the already wealthy. A government bill addressing this issue has just failed to become law and there is a serious prospect of the social security system running on the back of increasingly dangerous levels of government debt.

A significant problem for Argentina is its estimated 45% rate of tax evasion, according to Lundy. The low collection rate has pushed the government to increase the burden on tax-paying companies, which are generally the only ones available to foreign investors. But the new government has promised significant fiscal reform and so far there has been little capital flight.

Commodity price increases have helped most countries in the region. The major beneficiaries have been the oil industry in Mexico, Venezuela and Columbia,and Peru and Chile's copper companies.

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