SUNS  4305 Tuesday 20 October 1998


BRAZIL: CAPITAL FLIGHT UP, BUT BALANCED BY INVESTMENTS

Rio de Janeiro, Oct 16 (IPS/Mario Osava) -- Foreign capital is draining out of Brazil - with a further 12 billion dollars expected to go by the year's end - but so far incoming investments are swelling exchange reserves and keeping panic at bay.

More than 1.1 billion dollars left the country in the last two days, largely due to the payment of interests due on the foreign debt.
So far this month, however, capital flight has been balanced by funds entering from foreign groups who bought privatised companies in recent months. Another two billion dollars are expected in the
next few days from the sale of the Royal Dutch Bank ABN Amro.

But the country must shell out a further $12 billion before the end of the year, said Central Bank International Affairs director, Demosthenes Pinho Neto.

These correspond mainly to private sector and state company loan contracts, which expire with no possibility of refinancing, given that the international financial crisis reduced available capital
for and confidence in the emerging countries, like Brazil.

Income from the purchase of companies and banks, state or private, by foreigners "do not totally compensate the outgoing amounts," but reduce their impact, said Pinho Neto. However, last month's panic has been stilled, he added.

Foreign exchange reserves are expected to remain above the 47 billion dollar mark this month, said Maria do Socorro de Carvalho, head of this department in the Central Bank.

The economic authorities set the lower limit to which reserves can fall and the situation still remain manageable at 40 billion.

And to cover the possibility of having too little foreign capital to meet the many commitments expiring this year and next, the government is planning to seal an agreement with the International
Monetary Fund (IMF) over the next few weeks, which would bring $30 billion into the country.

In order to do this vice-finance minister, Pedro Parente, and one of the Central Bank director will travel to Washington at the weekend to present the IMF with the preliminary outlines of a fiscal adjustment programme which President Fernando Henrique Cardoso promised to make public next week.

A commitment already signed with the IMF states Brazil will make a fiscal effort to reduce public spending and increase tax revenue by 2.5 to three percent of the Gross Domestic Product (GDP),
equivalent to at least 20 billion dollars per year.

The measures are expected to reach Congress on October 26 or 27, announced head of the Senate, Antonio Carlos Magalhaes.

Cardoso's aim is to stabilise public debt over the next three years, putting an end to the explosive spurt which swelled it to 38 percent of the GDP, or 305 billion dollars, more than double the level of four years ago.

The brutal fiscal adjustment is an all out attempt to reestablish confidence in the national economy and to permit its future recovery, although it will also aggravate the recession predicted for next year.

But there are economists who consider devaluation of the real (the Brazilian currency) indispensable, as these fiscal acrobatics will not eliminate the need to reduce dependence on foreign capital.

Finance Minister Pedro Malan admitted that with an annual deficit in foreign current accounts of some 32 billion dollars, the country needs 65 billion toward the end of 1999 in order to remain solvent.

Two thirds will be funded by direct investments, favoured by the privatisation of the large state electricity generating concerns planned for next year.

The government is trying to speed the arrival the privatisation income in order to keep abreast of the emergency. Telefonica and other Spanish companies which acquired the Sao Paulo telephone
company are already thinking of paying up what they owe next year.

And an advance payment of up to $10 billion is expected for the state electricity companies.

On the downside, these efforts are all too reminiscent of the 1982 foreign debt crisis. Brazil has returned to the hunt for hard currency, knocking on the IMF's door once again after having
liberated itself from this entity's intervention in the economic stabilisation process initiated in 1994.