Brazil today faces the great challenge of demonstrating that it is a stable country, and, moreover, an attractive one for foreign investors. One way to do this is to get the financial support of the IMF (International Monetary Fund) in 2004. An IMF mission has been in the country to make a final revision of the current accord, which expires next November. The outcome of the visit has been more than satisfactory. It is now widely expected that the Fund will approve the outlay of the $4.3 billion dollars that Brazil needs to deregulate this year. But what will happen after November? Will Brazil´s agreement with the IMF be renewed? And even more crucially, under what conditions ill that happen?
Some analysts believe that the “honeymoon” between financial markets and the government of Brazilian President Luiz Inácio Lula da Silva is coming to an end. One result is that the value of the Brazilian currency, the real, dropped during early August – as one real once again went beyond the psychological barrier of three [units of Brazilian currency] for each U.S. dollar. Brazil´s country risk has also risen, reflecting increasing fears among investors regarding the country.
Nevertheless, Antonio Correa de Lacerda, president of SOBEET, a non-government organization that studies transnational enterprises and the economics of globalization, notes that this effect could be an isolated case. “I see this as a natural consequence of democracy. It’s nothing that compromises the future of the country. It’s about market movements that are also related to speculative movements, which in my opinion have very little consistency and must have a localized impact.” Correa de Lacerda is also a professor at PUC-SP, the Pontificial Catholic University of São Paulo .
If that is the case, must the Brazilian government follow the opinion of financial markets and comply with everything imposed on it? “It’s not obligatory but, as Ortega y Gasset (the Spanish philosopher) said: ‘I am myself and my circumstances,’” responds Roberto Macedo, researcher at the FIPE-USP, an economic research institution at the University of São Paulo, and a professor at the Mackenzie Presbyterian Institute in São Paulo.
And what are those circumstances? The vulnerability of the Brazilian economy — a consequence of its dependence on foreign capital in order to cover its financial commitments — is one of the main obstacles for the country’s growth and sustained development. Changing this is not an easy task, especially if one considers that, first, Brazil must have access to foreign resources in order to guarantee the payment of its debts. Secondly, the possibility of a moratorium in the payment of its debt significantly raises the risk for investors.
“Next year Brazil has to pay 34 billion dollars. (That estimate includes a forecast of the deficit in current transactions—including the total output of goods and services realized abroad and the portion of the country’s debt that matures in 2004). And that doesn’t depend only on Brazil, it also depends on its creditors,” notes Antonio Correa Lacerda. Moreover, considering that a deal with the IMF is one of the few options that the Brazilian government has in order to balance its accounts, “I would say that it would be wise to arrive at a preventive agreement with the IMF”, he adds.
Among unofficial Brazilian sources, a debate has emerged about whether it is a good idea for the country to turn to the Fund for capital. Although the IMF offers very cheap lines of credit — the Fund’s interest rates are a lot lower than market rates — the agency does require creditor countries to set a series of financial goals that are to be worked out during the period when the agreement is in effect. The IMF generally does not release the funds in the absence of creditor countries’ commitment to such conditions.
“The Brazilian government, like any other, accepts its commitment to the Fund, that the country will generate a surplus. Where the country is going to cut costs is its problem. The Fund says nothing with respect to that,” explains Antonio Jorge Ramalho de Rocha, a doctor in social sciences, and a member of international relations department of the Universityof Brasilia.
Revising the 1998 Agreement
During August, a team of IMF officials has been in Brazil checking data about the local economic situation, and coming up with the fourth revision of the last accord that was made between Brazil and the Fund. Initiated in 1998, the accord was renewed in 2002, during a period of instability that began with last year’s electoral process and culminating in the election of Luiz Inácio Lula da Silva as the new President of Brazil.
Current expectations are based on the supposition that a revision of the current agreement with the IMF will be approved, and that the Fund will release some $4.3 billion pending from the previous agreement. The chief of the mission sent to the country, Jorge Marquez-Ruarte, affirmed that he will recommend the release of these funds. The final decision will be taken by the IMF’s administrative council. However, in Brazil, renewal is widely believed to be assured because the country has complied with the goals set in the accord. The main goal was for Brazil to achieve a primary budgetary surplus R$ 31.4 billion during the first six months of this year. The official figure has gone beyond that target to about R$ 40 billion.
The problem is that the agreement signed with the IMF in 1998 expires next November. Representatives of the Fund have noted that the financial organization would be disposed to consider a possible application on the part of the Brazilian government to arrive at a new agreement. The federal executive branch, through its finance minister, Antonio Palocci Filho, affirms that it still hasn’t come to an agreement regarding renewal of the accord, but it has revealed that it is inclined to sign a new one with the IMF.
Another side of the coin is the country’s productive sector, which believes that the higher the IMF sets the Brazilian government’s goals for a fiscal surplus, the less public funds there will be to invest in the country, and in priority areas of education, health and security which will wind up being affected by spending cuts. In addition, if the government policy reduces investment in key areas of the economy by raising interest rates, this could lead to a scenario that represses growth and cuts into productive investment. The so-called Selic rate, [Brazil’s benchmark interest rate], is currently at 24.5% a year; it is kept at a high level to control inflation.
Stimulating Investment: A Major Priority
Brazilian experts interviewed by Universia-Knowledge at Wharton were unanimous in agreeing that the country is almost certain to renew its accord with the Fund. On the one hand, that is because the restrictions imposed by the IMF limit the Brazilian government’s ability to act. On the other hand, Brazil can dispose of capital, as a result of the agreement, that is essential for reassuring markets and stimulating efforts to attract foreign investment.
“Without a renewal of the agreement with the IMF, Brazil’s reserves in foreign currency would be very low and the country would be even more vulnerable than it is at the moment. I don’t see any way for Brazil not to renew the agreement, unless the government has some card – or some bit of information – hidden up its sleeve,” notes Macedo.
If the capital inflow from the agreement turns out to be unnecessary, it would be deposited as part of Brazil’s international dollar reserves, and it would serve as a guarantee that shows investors the government has alternatives to guarantee its compliance with its financial obligations. “That is the positive aspect—having money in its reserves to show strength in the international financial game. With low reserves, a speculative attack on the real would have a greater chance of causing serious damage,” warns Macedo. That is why it is so important for Brazil to renew its financial agreement with the IMF.
Due to the perpetual state of uncertainty regarding the Brazilian economy, and recent uncertainty in the international economy, investment in the country’s productive sector has suffered a disturbing decline. “Expectations for this year are for a 60% reduction in incoming foreign direct investment, and that’s compared with last year, when there was a reduction of 40% compared with the previous year,” explains Rocha.
At the beginning of 2003 the Central Bank published its “Focus” report, which gathers together forecasts from the financial sector regarding the behavior of a series of indicators. The report estimated that, by the end of this year, Brazil would receive $13 billion in direct investment and another $15 billion during 2004. But in its latest report, which was released in August, those numbers were slashed to $9 billion [for the rest of 2003] and $12 billion [for 2004], respectively.
One of the main goals of the Lula government is to turn around this scenario of decline, and to stimulate investment. To achieve that goal in 2004, being able to count on a guarantee from IMF resources is essential for guaranteeing [overall] stability, according to experts interviewed by Universia-Knowledge at Wharton in Brazil. In an effort to demonstrate that fiscal responsibility is a priority goal, the Brazilian government decided at the beginning of this year to raise the primary surplus goal that it made in its IMF accord — from 3.75% of the GDP (Gross Domestic Product) to 4.25%, until the end of 2003. The higher that percentage, the more money there will be, as a guarantee for the payment of the country’s public debt.
In addition, Social Security reform – one of the main factors considered by the market to guarantee the balance of public accounts – is being approved by the National Congress. On August 6, the reform plan presented by the Lula government was approved, with only a few modifications, in initial voting by a plenary session of the Chamber of Deputies. The text must be ratified in a second vote by the Congress and then be sent to the Senate, where it will be voted on again on two occasions. When these steps are completed and the bill is approved by the two chambers, the plan will need presidential authorization.
Relaxing IMF Conditions
The Brazilian government is clearly disposed to reach a new agreement with the IMF. Taking into account that Brazil has complied fully with the promises it has made to that international organization, the government hopes to get some relief, in the relaxation of goals imposed by the Fund.
The main Brazilian demand involves how the IMF calculates key results that are taken into account [in evaluating Brazil’s progress toward meeting its goals.] Brazil wants the IMF to make changes in the rules that mean that investments made by its state-owned enterprises or by the government itself can be entered into its accounts as expenses. That would affect the government’s need for cutting its expenses in order to achieve surpluses that are high enough [to meet its goals]. If such investments were removed as expense items, it would take less effort for the government to comply with IMF goals.
“I wouldn’t say that it is going to be an easy goal [to relax the rules of the IMF], but there is a chance of achieving it. Brazil has truly gone beyond its obligations of complying with the goals set by the IMF — generating, for example, a basic surplus that is larger than what was set in the agreement. So, there is room to relax the rules”, says Antonio Correa de Lacerda.
In Brazil‘s current circumstances, experts explain that a new agreement with the IMF would be very beneficial, whatever form it takes. Numerous sectors are putting pressure on the government — such as judges and public employees who seek to maintain their benefits despite the reform of Social Security; rural workers who have no land; and homeless people. It remains to be seen how the Lula government overcomes these difficulties – and how it takes the country along the long-advertised, highly desired path toward sustainable growth.
