SUNS 4298 Friday 9 October 1998



BRAZIL: IMMINENT FISCAL ADJUSTMENT ON THE CARDS

Rio de Janeiro, Oct 7 (IPS/Ricardo Soca) -- Brazil's President Fernando Henrique Cardoso, reinforced by the vote of confidence at the polls Sunday, is now preparing to attack a swollen fiscal
deficit.

Cardoso was re-elected by around 53% of voters in the first round of elections Sunday despite prior announcements of harsh adjustments to come.

Supported by all the political parties except the left, Cardoso has the backing of three quarters of the Senate and Chamber of Deputies, the strongest legislative standing of any president-elect
in the political history of Brazil.

In fact, his parliamentary base, formed up to now by the conservative Party of the Liberal Alliance (PFL) and Brazilian Social Democrat Party (PSDB), has been joined by the centre-right Party of the Brazilian Democratic Movement (PMDB) and Brazilian Progress Party (PPB).

And as if fiscal adjustment were not enough, the government is also hoping for Congress approval on welfare reforms before the end of the year - the social security system is responsible for the lion's share of the fiscal defict - and rationalisation of the tax system.

Political and business circles anxiously await plans for adjustment to be announced by Cardoso, along with announcement on aid expected from the International Monetary Fund (IMF), the World Bank and, possibly, the United States.

The adjustment process will not aim to totally eliminate the $60 billion public deficit - equivalent to 7.5% of Gross Domestic Product - but merely shrink it by around $25 billion, the minimum
reduction demanded by the IMF.

Legislators and business sources warned the adjustment will have to come from cut-backs in government spending, as the country is unable to cope with even the smallest increase in tax demands, an item already swallowing 31% of Gross Domestic Product.

According to the prevalent outlook in political and financial circles, the credit line offered Brazil by the multilateral entities will be between 25 and 30 billion dollars. Despite the categoric victory won by Cardoso, his critics say the leader failed to execute the original plan of his Brazilian Social
Democratic Party.

The plan was to improve the economy in the first four years of government, dedicating the second term in office to tackling Brazil's serious social problems.

Whilst negotiating with parliament the constitutional reform needed to permit his re-election, Cardoso was obliged to make concessions which increased the fiscal deficit.

This endangered his only great achievement, the monetary stability won by the Plan Real, which he imposed during his time at the front of the Finance Ministry in 1994.

With government accounts so deeply in the red, even Brazil's chunky foreign reserves at the beginning of August - some $74 billion - were not enough to stall investor panic at every new spasm of the world crisis.

Since mid-August, when the wobble hit Russia, dizzying capital flight drained nearly $30 billion from the Treasury coffers, a loss which would have been far bigger except for the money flowing in
from the privatisation of State enterprises.

And while the nation waits for adjustment, recession is already banging on the doors of the Brazilian economy.

Nose-diving sales in the auto industry, the engine of the manufacturing sector, have caused a backlog of 200,000 unsold vehicles on the factory forecourts - the highest number in its history - while thousands of workers are being laid off.

Renowned sociologist, Eduardo Giannetti said it appears Cardoso will accomplish the targets of "four years in eight," an ironic reflection on the slogan of Juscelino Kubitschek, president of
Brazil in the late sixties, who promised to move the country forward "50 years in five."