IMF loan to secure Brazil

Foreign investment is expected to slow for Brazil

The International Monetary Fund has approved a $15.6bn stand-by loan for Brazil in the aftermath of Tuesday's attacks on the US.

Although it is was expected, the approval comes as Latin America's largest economy is now expected to suffer investment difficulties on top of existing economic troubles in neighbouring Argentina and a domestic energy crisis.

The uncertain international economic environment and a domestic energy crisis have put substantial pressure on financial variables

IMF

Analysts expect investment in emerging economies to slow after the attacks, which would make it difficult for Brazil to meet its foreign debt repayments.

The Brazilian real currency firmed on Friday from record lows but only after the country's central bank stepped in to defend the currency.

Still Brazil's real has fallen 3% since Monday's close, while Sao Paulo's Bovespa stock exchange plunged more than 15% after the attacks.

Brazilian economy

The plunging currency means Brazil is now not expected to meet its 6% upper target for inflation this year.

Brazilian stock markets plunged after the attacks

This in turn is likely to keep the Central Bank from lowering its interest rates, currently at 19%.

The high interest rate level makes Brazilian debt financing more expensive, making the country even more dependent on foreign investment to balance the national accounts.

Brazil's gross domestic product fell 0.99% from the first to the second quarter this year. Another quarter-on-quarter fall would put the country in technical recession.

Analyst outlooks

On Friday, a statement by Standard & Poor's deepened fears for emerging markets after it said the attacks on the US would inevitably limit access of those countries to international finance.

"As the world fell into recession in recent months, several crunch points turned into crises," Bear Stearns added on Friday.

"These will worsen. In particular, Turkey, Argentina and Brazil are disproportionately harmed because they depend on risk tolerance," it said.

IMF loan

In a statement, the IMF lauded Brazil's progress in recovering from the 1998 financial crisis by "significantly strengthening" its fiscal position and shifting to a floating exchange rate regime.

"Despite these achievements, the uncertain international economic environment and a domestic energy crisis have put substantial pressure on financial variables," Anne Krueger, the fund's First Deputy Managing Director, said in a statement.

Brazil will be able to draw up to $4.7bn immediately while another $460.2m would be available after a review is completed around the end of the year.

The rest would be made available in four tranches through 2002.