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Sunday, September 20, 1998 Published at 22:18 GMT 23:18 UK

Business: The Economy

Grim reaper knocks at Brazil's door

BBC Economics Correspondent Evan Davis looks at whether Brazil will be the next country to be hit by the economic crisis sweeping the world.

Having swept from Asia to Russia, Latin America has endured a few rocky days. Venezuela, Columbia, Ecuador and Chile have loosened their currency bands.

[ image: Evan Davis:
Evan Davis: "Brazil looks vulnerable"
Latin stock market values have gyrated by daily amounts of 15% in either direction.

Brazil - the biggest economy in the region is the one on which most attention is fixed.

It certainly looks vulnerable. And it certainly matters.

Its GDP is 30% bigger than that of South Korea; its links to the US far closer; and its potential to knock other major economies - such as Argentina - down are large.

So will Brazil go?

The answer is that nobody knows.

The main feature of the recent instability is that it sweeps the world combining modest, relatively manageable problems (such as excessive trade deficits) with financial panic, to produce large, unmanageable problems.

[ image:  ]
Brazil has one piece of the combination: problems.

The question that no one can answer is whether there will be a panic to transform them into catastrophe.

Panic is a capricious beast, and is beyond accurate forecasting.

Some economists are attempting to model the causes of financial crises, and on this count Brazil has some reason to worry: large trade deficits and large volumes of short term, external debt feature heavily in most cases.

Brazil has both - it needs to find about $95bn in the next year to fund its debt obligations, and to pay for its trade deficit.

On the other hand, it has plenty of reserves - but still not enough to fund all of this. The fear the country will run out of dollars could prompt a flight of capital from the country, with all the consequences.

Add to these factors, the recognition among investors that the Brazilian real is overvalued, and prices there high.

The high exchange rate makes it easier for Brazil to pay out the dollars that it owes; but make it more vulnerable to a flight out of reais (the plural for reals).

Good omens

However, the omens for the next few weeks are surprisingly good:

  • The IMF and the American authorities have talked the country up before any disaster occurs

  • There is an election on 4 October which the incumbent should win

  • After the election the incumbent should be able to take some tough action on the relatively modest problems there are. That is to say it should be able to put up taxes to reduce the government deficit

This should mean that collapse might be avoided, or postponed until the markets have seen whether the requisite action is to be taken.

Well, you will not find me predicting whether the country can make it past 4 October without a major currency or debt crisis.

It may all hinge on whether any other small global problems trigger more generalised panic among investors.

Tough decisions ahead

If Brazil gets that far though, it is not out of the woods. President Cardoso will have to make some very tough decisions to correct the problems the country has already. And it may be that he is not able to implement them.

If he cannot, the tough decisions he will end up taking, will be to let the currency fall and perhaps to reschedule a portion of debt.

At best, Brazil has a 50% chance of making it to Christmas without the Grim Reaper getting in through the front door.

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