Brazil's macro-economy has been through two enormous shocks in the space of three years as the rÃ©al...
Brazil's macro-economy has been through two enormous shocks in the space of three years as the rÃ©al has slipped from near parity to the US$ dollar to nearer R$3 during October.
Arminio Fraga, head of the Central Bank, told us he had hoped for a four to five-year adjustment process for the external account, the transition comfortably financed by plentiful foreign direct investment.
Unhappily, the synchronised global slowdown, a sharp reduction in FDI to half the run-rate of 2000 and a steady escalation in the Argentinian crisis truncated this adjustment into only nine months.
Happily the result, though painful, has been controlled. In spite of the rÃ©al's weakness, inflation remained subdued, debt statistics remained manageable and interest rates climbed to only 19% (a far cry from the 45% rate required in the 1999 devaluation).
Although inflation has breached this year's upper band of 6% and is looking to hit the top of next year's limit of 5.5%, the central bank has indicated that it is not prepared to sacrifice economic growth to force down headline figures.
With a healthy trade surplus, the economy should be able to grow at 2%-2.5% next year, with energy rationing lifted by the end of March 2002. High rainfall and lower consumption have helped and there is talk of rationing levels being much reduced during December. Some early relaxation is likely, but the government cannot breathe easy until the end of the rainy season in April. In the short term, emergency measures and rain will assure power supplies through to 2003. In the medium to long term electricity regulation remains a mess, with few incentives for foreign investors to either buy existing power or, more importantly, build much needed thermal generation capability.
Caspar Romer is director, Latin America, F&C Emerging Markets
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