SUNS 4364 Monday 1 February 1999

Rio de Janeiro, Jan 28 (IPS) - The Central Bank shunting interest rates up to 34% was not enough to stop the Real's free fall, due to fears that stocks of dollars on the financial market will soon come
to an end.

The exchange rate started Thursday at a stable 1.9 per dollar, an apparent indication that the plunge may be bottoming out at 57 percent higher than on Jan 12 - the day before the Brazilian
exchange rate was freed.

Stock exchanges tend to follow the dollar, that is, they rise in direct relation to the depreciation of the Real, reflecting how stocks and shares are tied to the dollar despite being negotiated
in Reals in Brazil.

Sao Paulo's market saw a rise of 0.54% Wednesday, with a low volume of business, apparently as traders were waiting for defined parity in the exchange rate. The Rio de Janeiro exchange also saw a positive outcome of one percent.

However, a great deal of time will be needed, probably in the region of months, for the market to reach a point of equilibrium, overcoming brusque oscillations of more than five percent up and
down in the same day, said banking analysts.

The Central Bank decision not to spend international reserves in shoring up the exchange rate and the constantly negative flow since the free floatation of the Real, means dollars are now in short
supply in the commercial banks.

Brazilian financial daily, the 'Gazeta Mercantil' unveiled estimates that there are only $500 million left in the banks, a sum which could leave the country in just one day - as was the case last Friday.

Central Bank reports said the net departure of capital Tuesday was $339 million, and not the $538 million reported earlier. A remittance of $199 million was cancelled.

By 20:00 GMT Wedneday, only $112 million had left the country, indicating the haemorrhage is far from over and the consequent devaluation pressure on the Real with continue.

This lack of liquidity, with the banks short of dollars to meet demand, makes the market nervous, said Paulo Ferraz, president of the Bozano Simonsen Bank, active in large investments and
privatisation.

Within this framework, Citibank, a US concern, was selling dollars to tourists at 2.05 Reals while the other banks were asking 1.95. Meanwhile the rate for buying Reals was far lower - at 1.55 - a difference justified by the uncertainty of any longer term negotiations.
In such a sensitive situation, negative and positive news only aggravate events.

National Congress approved the 1999 budget Wednesday, adapted to the fiscal guidelines agreed with the International Monetary Fund which demand a primary surplus of 2.6% of Gross Domestic Product.

But this decision does nothing to calm the market, because this income includes contributions from taxes still awaiting approval in parliament - on cheques and fuel. The former has already been
passed by the Senate and the lower house has until March to vote on it.

Negative influences also come from abroad. The US Salomon Smith Barney bank released an evaluation that the dollar will reach a rate of 2.25 to 2.5 Reals in coming months, to fall back to two
Reals by year's end.

Brazil's interest rates will rise to 50% by the end of the year and inflation could hit 35%, said the apocalyptic predictions of this bank - a big investment mover.

Inflation has in fact now become the main concern in the nation. Price rises have started, including those lines of business little dependent on foreign trade, like varied foodstuffs, hotels and
services.

The Brazilian Supermarkets Association launched a campaign against industrial sectors which aim to increase their prices, recommending its affiliates refuse to buy products which are unjustifiably more expensive, seeking alternative suppliers.