Just as the specter of past economic plans seemed to be fading from the memory of the
Brazilian people, the country has been shaken by yet another government-sponsored "pacotão"
(big package) as Brazilians call the infamous emergency decrees . On November 10, the
government released a 51-item fiscal package in an attempt to absorb the shock waves of
the ongoing international stock market crisis, which has cast dark clouds over Plano
Real's hard-won stabilization. The new austerity plan comes in the wake of successive plunges in the nation's stock
market in response to the Asia crisis. The plan will attempt to achieve an ambitious $20
billion budget-savings by means of tax hikes, federal spending cuts, and other measures.
By doing so, the government hopes to send a twofold message to the world: first, that
President Fernando Henrique Cardoso (FHC) will go to any length to defend Brazil's
currency, the Real, against speculators—even if some of the unpopular measures
adopted may jeopardize his re-election bid. Secondly, it is an attempt to convince the
international community that the Brazilian market is on much firmer ground than volatile
Asia, and investors should keep their faith in the country. Economists and major international financial institutions, such as the Interamerican
Development Bank and the International Monetary Fund have applauded the government's swift
response to the market turmoil. When the crisis arose and stocks began slumping around the
world, the São Paulo Stock Exchange Index (Ibovespa) had the worst performance of all
world markets. Just to have an idea, in eight days Brazilian reserves were down by over $9
billion as investors pulled their money out of the country. To stop the trend Banco
Central (Central Bank) felt it had no choice but to raise interest rates, and it did so to
excess, by nearly doubling the annualized prime lending rates to 43.3%. After the initial losses were computed, 450 investment funds out of a total of 780
funds operating in Brazil had lost money in October. Steel maker Companhia Siderúrgica
Nacional (CSN) lost $185 million with the devaluation of its shares by 5,88%. Recently
privatized Companhia Vale do Rio Doce (CVRD) saw its shares price plummet 18%—a loss
of 1,7 billion—while supermarket chain Pão de Açúcar had its shares devaluated by
$86 million. Although Brazil's current crisis may be in part a reflex of the international
turbulence, it has also exposed Plano Real's lack of a solid fiscal foundation, as it had
been previously pointed out by economic analysts. For one, the country imports more than
exports, which leaves Brazil very dependent on foreign investments to finance the trade
deficit. Moreover, the government spends more than it collects in revenues, and until now
there has not been political will to fight the public deficit. Had the Brazilian
congressmen moved faster to approve the constitutional reforms sitting on their tables for
the past two years, perhaps some of the bitter measures adopted might have been avoided. The proposed 10% hike on income tax, for instance, will inevitably punish the middle
class, the majority of which has never participated in the stock market speculative game.
The government team delivered the news in such a way that it sounded as if the increase
was no big deal. For some taxpayers, though, the additional decision to impose a 20% limit
for tax deductions and benefits would have resulted in an increase of three times as much
as what they are currently paying in taxes. The decree, which must be approved by
Congress, was met with such a fierce opposition that the government eventually
relinquished, and decided to allow taxpayers to deduct 100% for medical and dependents'
expenses. As one would expect, any economic package drawn in a hurry will be likely fraught with
inconsistencies and misguided measures. In this case, everyone agrees that the
government's decision to dismiss 33 thousand civil servants from Brazil's bloated public
work force is the right thing to do. At the same time, the government also expects to save
close to $230 million/year by overturning 40 thousand fraudulent Social Security
retirements. The problem is, among the 33 thousand federal employees to be dismissed,
there are 1,800 auditors employed by the Ministry of Social Security and Welfare who have
unveiled some 145 thousand illegal retirements in the past five years. The new fiscal package also aims to save $1.7 billion in public expenditures in 1998,
while vowing to spare important social areas, such as health and education. Nevertheless,
six thousand health inspectors who work on the program to eradicate the dengue mosquito
will be dismissed as well. In the event of a dengue fever epidemic, the government would
spend far more than the $71 million it expects to save in this area just in treating those
infected by dengue fever. Another controversial measure was the increase in airport departure tax from $18 to $90
for international flights, which has now become the world's most expensive departure tax.
The government expects to collect $500 million in revenues with the tax hike, assuming
that 5.5 million tourists will visit Brazil next year. What the measure didn't take in
consideration was that 60% of all foreign tourists visiting Brazil come from Mercosul
countries. Some of those tourists will have ticket prices increased by as much as 50%,
which may lead them to choose other destinations. Why? How could Brazil, with a relatively stable economy not seen in many years, be so much
affected by the Asian imbroglio? So far, economists and financial experts have yet to come
up with a definite answer. They have blamed the evils of globalization. They have searched
for explanations in Karl Marx's theory that in the capitalist world the economy has a life
of its own that defies reasoning and common-sense. On the other hand, critics of the
exchange rate policy adopted by the government insist that as long as the Real remains
artificially overvalued, market speculators will be always on the lookout for a currency
crisis. The cause of speculative attacks that force the kind of devaluation that occurred in
Asia is the perception of a vulnerable economy and of a fragile currency. Had the
Brazilian government done its homework regarding the external and public sector debts as
well as the trade deficit, the country would probably be safe from speculators. After all,
Brazil's reserves are over $50 billion, inflation is low, the banking system is reasonably
solid and the privatization program has been carried out successfully—all of which
are essential factors to discourage speculation. Some of the countries least affected by the international crisis, such as Italy,
Sweden, the Netherlands and Chile are the very ones whose governments have set a solid
economic base by means of competent management of their economies. If Chile, for instance,
escaped the market turmoil, it was due in large part to its reputation of sound economic
administration. Its current account deficit of 3,8% is the lowest in Latin America, yet
the government is already taking steps to reduce it even further next year. What's Next? In the meantime, Brazilians brace for lean times, since an economic slowdown or even
recession will certainly follow as a result of the new rules. Although the government
expects to maintain the high interest rates for only a few months, no one knows for sure
when they will be lowered. It all depends on the global market uncertainties, which have
recently chosen mighty Japan as the latest victim. Analysts predict that the automotive sector will be one of the hardest hit. This
industry, which has thrived in the past three years thanks to low inflation and easy
access to credit, is expected to shrink by as much as 40%. Ford has already canceled
production for 18 days, and its employees fear layoffs will ensue. General Motors
announced it will reduce production by 25%. The same feeling is shared by other sectors,
and several companies have put their investment plans on hold until the clouds hanging
over the country's future have dissipated. Brahma, Latin America's largest brewer has
postponed investments of $270 million. If there is any comfort amid the chaos is that for the first time in Brazil a President
has launched such tough and unpopular measures just 11 months before presidential
elections. However, FHC's adversaries contend that he had no real choice. They claim that
if the Asian hurricane had not swept the international market, the president would have
waited until he was re-elected to take the steps he did. Even if that's the case, by
taking speedy action in face of the crisis that hit Brazil, FHC has boosted his
credibility among the international community, portraying an image of a serious statesman
committed to the nation's interests, not his own. Until now, FHC had been riding on Plano Real's achievements, specially the victorious
battle against inflation. His re-election was all but guaranteed. How much the fiscal
package will influence voters has yet to be seen, but analysts predict that the sense of
urgency in face of the financial crisis will minimize Brazilians' reaction against the
president. A survey conducted by the Vox Populi polling institute for Brasília's Correio
Braziliense newspaper just hours after the announcement of the emergency plan showed
that Brazilians continued to support FHC. Out of the 500 people polled across the country
by telephone, 55% considered the measures necessary, while 61% kept their faith in the
government. However, a more targeted poll in São Paulo only—conducted by Datafolha, and
published by Folha de São Paulo newspaper—showed a sharp decline in FHC's
popularity. Only 28% of the people surveyed said they would vote for the president if
elections were held now against 33% in June. The survey, which has a margin of error of
plus or minus 4%, also showed that FHC would still beat his nearest rival, former São
Paulo mayor Paulo Maluf, who would get only 20% of the votes. Prognosis According to the experts, gross domestic product (GDP) growth for next year is expected
to remain between 2%-2.5%, with a strong possibility that the country may fall into
recession. However, the slowdown of the economy, together with the government's incentives
to exports, should account for a 15% increase in that area, which would soothe the pain of
an eventual recession. No matter how bad the stock market is, that should not be a deterrent to foreign
investors as far as the privatization of state-owned companies is concerned. Dutch bank
ING estimates that if the government keeps to scheduled privatization program, some $35 to
$40 billion in receipts could be brought into the country in 1998 alone. Overall, foreign
investors will be more reluctant to pour their money into Brazil, but investments should
not come to a complete halt. The potential of the Brazilian economy will always be
attractive to international investors. Altogether, the $20-billion fiscal package is ambitious if not perfect. The government
must succeed in implementing its main measures in order to achieve the much-needed deficit
reduction. If it fails, the consequences can be disastrous; if it succeeds, Brazil will be
coming out of this crisis stronger and heading for the next millennium as one of the
world's most important economies. . Increases personal income tax by 10% effective in 1998. . Establishes a limit of 20% for tax deductions and benefits on personal income taxes. . Temporarily increases oil, oil derivatives and fuel alcohol prices. . Increases the IPI (Industrialized Product Tax) on alcoholic beverages, tobacco and
automobiles. . Increases airport departure tax from $18 to $90 for international flights; domestic
flights are not affected. . Reduces the exemption on goods purchased in Duty Free shops from $500 to $300 in 1998
and 1999. . Establishes new customs laws and puts in place a thorough inspection of the
$500-exemption on goods purchased abroad. . Reduces all regional and sectorial incentives by 50%. . Raises import taxes (which will affect some 9 thousand Mercosul's products). . Eliminates exemption given to health, educational and sport institutions. . Reduces public expenditures by approximately $1.7 billion in 1998, excluding health,
education, social security and agrarian reform. . Fires 33 thousand public servants without guaranteed job security from the Federal
Public Administration. . Freezes wages and pensions of 1.1 million federal employees during 1998. . Eliminates 70 thousand vacant civil posts in the Executive branch of the government. . Eliminates the incorporation of commissions to salaries. . Reduces the number of commissioned posts by 10%. . Limits the creation of public civil posts to 1/3 of granted retirement and vacancies
in the previous fiscal year. . Reduces service contracts by 20% (a $580 million cut). . Reduces around $500 million in the sum allocated to new projects in 1998. . Cuts teaching and research grants by approximately $100 million. . Creates mechanisms that make it harder for states and municipalities to get bank
loans. . Increases federal company revenues by close to $1.8 billion. . Cuts approximately $900 million in personnel expenditures, including dismissal of
employees and a hiring freeze. . Reduces the limits of federal companies' indebtedness. . Reprograms federal companies' investments. . Accelerates the privatization of the basic sanitation system. . Includes the Brazilian Reinsurance Institute (IRB) and federal highways in the
National Privatization Program. . Offering of Eletrobrás issues on the international market. . Creates a support fund for small and mid-sized companies, aimed at increasing exports
and investments. . Allows access to external credit to producers of agricultural inputs used in
exportable products. (1986 -1997) A Brief History February 1986 - Plano Cruzado. Among other measures, the plan launched by
President José Sarney replaced the old currency—the Cruzeiro—by the Cruzado,
and froze prices, salaries and exchange rates. The dream of a new economic era under
"zero inflation", as proclaimed by the government, ended a few months later due
to the plan's lack of structural basis. November 1986 - Plano Cruzado II. An attempt at mending the failures of the
previous plan. June 1987 - Plano Bresser. Named after Minister Luiz Carlos Bresser Pereira, it
was just another unsuccessful attempt to bring the Brazilian economy back on track. January 1989 - Plano Verão (Summer Plan). Third and last plan under Sarney's
administration, it introduced yet a new currency, the Cruzado Novo, but again failed to
tame inflation. At the end of his mandate, Sarney and his economic advisors left a legacy
of an 84% monthly inflation. March 1990 - Plano Collor I. Promising to kill the "inflation tiger"
with one single bullet, President Fernando Collor de Mello delivered this heterodox plan
and shocked the population by "temporarily" confiscating savings accounts and
other investments. The plan also replaced the Cruzado Novo by the old Cruzeiro again.
Inflation remained out of control, and seven years later Brazilians affected by the
confiscation are still fighting to get their money back. August 1993 -Plano Collor II. It established the Cruzeiro Real as the country's
new currency, but failed to bring inflation down. A few months later Collor was impeached
on charges of corruption. July 1994 - Plano Real. President Fernando Henrique Cardoso's plan adopted a
strong currency, established high interest rates to slow consumption and eliminated prices
indexation and tariff barriers to imports. It succeeded in bringing inflation down to
historical low levels but still lacked some adjustments, specially in the fiscal area. November 1997 - Fiscal Package. Entitled "Fiscal Adjustment and
Competitiveness Measures" the plan is the latest attempt by FHC's administration to
fight off the negative impact of the international market's crisis on the Brazilian
economy. It also carries out some of the structural reforms needed to consolidate Plano
Real. In spite of a more stable scenario both at home and abroad, it is still early to
predict how the Brazilian stock market will perform in the months ahead. Stocks have had
some gains in recent trading sessions, but the market needs speculative capital in order
to sustain a good performance. Since foreign investors are still wary of the uncertainties
faced by the country, it may take months before the market starts to fully recover. In the meantime, the Central Bank has vowed to find out the culprits for the market
crash in October. The bank is already investigating the losses suffered by financial
institutions. If proven that the banks acted recklessly by being too dependent on
high-risk operations, the Central Bank may change the rules that govern the financial
system in order to protect investors in times of international crises. Bank officials also want to know who speculated against the Real. Analysts believe that
the Central Bank will never be able to prove if investors intentionally bet against the
currency, or if they just reacted to defend their patrimony against an eventual currency
devaluation. Either way, investors who speculated in the Chamber of Trade and Futures have
lost close to half a billion dollars in anticipation of a currency crisis. On the other hand, companies such as Telebrás, CSN, Brahma, Electrolux, and others are
buying their shares back at a time when their prices have become very attractive.
Telebrás, for instance, will spend $100 million in re-buying its shares, which are valued
at $112 per block of a thousand shares—a drop in value of nearly $60 after the market
crash. The companies' decision to re-buy their own shares is a good indication. It means
they believe the market will rebound in spite of more pessimistic predictions about the
future of the Brazilian economy. Marta Alvim is a Brazilian journalist, freelance translator and
interpreter. You can reach her at mltdalvim@yahoo.com
Déjà Vu
The recent Asian market crisis has shaken Brazil badly. In response
the government used what many Brazilians thought had been buried with the disastrous
economic plans of the past: the pacote (package). The crisis shows Plano Real's
lack of a solid fiscal foundation. Some of the measures being adopted might have been
avoided had the congressmen moved faster to approve the constitutional reforms sitting on
their tables for two years.
Marta Alvim
PACKAGE'S
HIGHLIGHTS Revenue Increases:
Budget Reduction
State-Owned
Companies Privatization
Export Incentives
PACKAGES PAST
STOCK MARKET
