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Brazil's economic prospects start to sparkle

BRASILIA: Latin America's largest economy, Brazil, could be entering a new phase of higher growth as a combination of strong fiscal performance, booming investment and tumbling interest rates boost its growth potential, economic analysts said on Wednesday.

The country's Central Bank cut interest rates late on Tuesday to their lowest levels since the introduction of the real currency in 1994 the latest piece of uplifting news in recent days that has put a sparkle on Brazil's prospects.

"We still have to cross our fingers that Brazil hits that 4-5 percent growth trajectory," said Siobhan Manning, Latin American debt strategist at PaineWebber in New York. "But we are on a new trajectory here."

The current situation is "pretty much ideal," she said.

Analysts said Brazil has seldom seen such a combination of supportive factors in more than two decades as now, which has allowed the country to return with a vengeance from a dramatic January 1999 currency devaluation which had many economists expecting dire prospects for years.

The results were gross domestic product growth of just under one percent last year compared with predictions of a five percent contraction, record foreign direct investment and financial markets at all-time highs.

This year the government expects four percent growth in 2000.

During the 1990s Brazil posted about two percent average annual growth, way below regional countries like Mexico and Argentina which had average annual growth above five percent.

Analysts list stable inflation, rising exports thanks to the devalued currency, high foreign investment and improvements in Brazil's fiscal accounts as the main reasons behind the optimism.

But the international scenario is also giving a helping hand, with global growth seen high and international financial markets supported despite rising interest rates in the United States.

Specifically, a deal by major oil exporters to increase crude production on Tuesday was beneficial as it reduces the cost of oil for Brazil a net oil importer. The Central Bank said the oil deal was the main reason for the rate cut of its benchmark Selic rate to 18.5 percent from 19 percent as it will help keep domestic price rises subdued.

Analysts think that there could now be more rate cuts in coming months, fuelling the economy into higher growth.

At the end of last week another pointer of the improved prospects entered the equation the newly floating currency strengthened so much that it prompted Central Bank intervention that appeared to be directed toward weakening it. The real is still trading near its highest levels in months.

"The rate of the currency's appreciation was too fast," said Odair Abate, chief economist at Lloyds TSB in Sao Paulo, pointing to the fact that too much currency strength could weaken the balance of payments accounts.

Still, Manning said she was not worried about the currency strengthening to recent highs of about 1.7 to the dollar from more than 2.15 at the height of the currency crisis.

"At this point there is not even a yellow light in my mind," on the currency's strength, she said, as the currency is still very weak.

Brazil's Achilles heel during the last two years was its huge budget deficit. But after meeting strict fiscal targets last year, agreed under the terms of a $41.5 billion bailout loan led by the International Monetary Fund, that has all changed.

January public sector balance figures released last week showed that the nominal budget which includes all spending items including debt costs fell back to earth after the devaluation boosted it to stratospheric levels. As January 1999 fell out of the 12 month measure, the budget gap fell to a more normal level of 4.6 percent of GDP from 10 percent in the 12 months to December.

Abate said this combination of factors "has improved the chances for higher growth this year and in coming years."-Reuters