Recession is forecast

 BY JANE BUSSEY

 Brazil has been one of the brightest spots in the region this year, thanks to an economy gathering strength, strong approval ratings for President Fernando Henrique
 Cardoso and heavy flows of foreign investment. But now, its prospects dimmed by problems clouding Argentina, the biggest economy in the region appears poised to deliver a pallid performance.

 Since February, the Brazilian currency, the real, has dropped in value by some 25 percent, the prime interest rate has climbed to more than 19 percent -- or about five times the rate of inflation -- and the economy is expected to post an anemic growth of 1.7 percent.

 Brazilians are blaming Argentina, complaining that their neighbors' repeated brushes with debt default and devaluation have become contagious, causing skittish investors to pull out of Brazilian financial markets and putting devaluation pressure on the real.

 With diplomatic aplomb, Argentina's economy minister, Domingo Cavallo, recently shrugged off the finger-pointing that starts when Argentines and Brazilians meet.

 ``People used to blame Brazil for our problems, so it is reasonable that today they blame everything that is happening in Argentina for their problems,'' Cavallo said
 recently in Buenos Aires.

 But in a nod to mutual concerns and interdependence, Daniel Marx, Argentina's deputy economy minister, who negotiated the recent $8 billion credit line from the
 International Monetary Fund, flew to Rio de Janeiro at the end of August to discuss the details of the latest rescue package with Brazil's central bank president, Arminio Fraga.

 André Loes, chief economist at Banco Santander Brazil in Sao Paulo, likened the complaints from Brazilians to ``soccer rivalry.''

 ``No one wanted to be affected by their neighbor,'' Loes said.

 The financial problems in Argentina ended up exposing some of the weaknesses in the Brazilian economy.

 NEEDS FINANCING

 Brazil's main difficulty continues to be its need for large amounts of outside financing, both to pay for the country's imports and to service its debt, especially eurobonds, which cannot be refinanced.

 ``The country has huge external financing needs,'' Loes said, estimating that the country needs $40 billion in fresh funds this year.

 A sharp slowdown hit Brazil in the second quarter, when growth was less than 1 percent. Many economic forecasters are expecting a full-fledged recession in the second half of the year. Foreign direct investment fell from $18.5 billion in the first seven months of 2000 to $12.4 billion in the same period in 2001. The current account deficit -- the broadest measure of the trade imbalance -- widened from $12.5 billion in the same period last year to $15.4 billion this year.

 In a sign of the importance Washington places on Brazilian stability, the IMF arranged for $15 billion in new lines of credit for Brazil several weeks before acquiescing on a new bailout package for Argentina. As a condition for the new lending, Brazil is required to trim $2.5 billion from federal and state spending over the next 18 months.

 Officials insist the money is just ``armor plating'' to protect the country against financial turbulence, a defense that hardly worked in Argentina's case.

 ``We are not in crisis and will not go into crisis,'' said Finance Minister Pedro Malan, the Berkeley-trained economist who has steered Brazil through the past several
 years of financial volatility and is a presidential hopeful in the October 2002 race.

 Less than one year ago, no one was talking about a crisis.

 At the end of 2000, Brazil was viewed as one of the brightest spots in Latin America, having successfully recovered from a January 1999 devaluation of the real, but
 political and economic developments have clouded the future.

 Higher interest rates are hitting harder because of electricity rationing, which is the result of the country's worst drought in 60 years and, some critics charge, the
 government's inattention to investing in new power plants. The Cardoso government has ordered households and businesses to cut consumption by 20 percent or face rolling blackouts.

 While the presidential and legislative elections are more than a year away, they already are affecting domestic politics and international confidence.

 Cardoso is dogged by not only the power shortages but also a corruption scandal. Investigators are probing a former president of the central bank who allegedly sold inside information to an ailing private bank, Banco Marka, and the investment bank FonteCindam, allowing them to make windfall profits when Brazil decided to abandon its fixed exchange rate in 1999. The investigation has focused on Francisco Lopes, who directed the central bank for 20 days before being replaced by Fraga, who previously had managed a hedge fund for global investor George Soros.

 RESURGENT HOPEFUL

 The bank scandal has weakened Cardoso's popularity. That could make it tougher for the president, who launched the successful economic stabilization program that tamed hyperinflation, to leave a chosen successor.

 Workers Party candidate Luiz Inácio ``Lula'' da Silva, who has lost three presidential races since 1989, has staged a strong fourth bid and at times has led in the polls by 32 percent against other possible candidates who clustered around 11 percent.

 Analysts view this race as Lula's best chance to become president, and the leftist candidate has toned down his anti-business stance. But some business leaders
 continue to feel uneasy, both about Lula and about the lack of a clear candidate from Cardoso's political coalition.

 ``People are very apprehensive about the prospects of a victory of Lula or any other question mark they don't know,'' said Alexandre Barros, president of the Brazil
 Business Forum and a political analyst in Brasilia.

 ``And nobody really knows about this electricity rationing. How are voters going to react?'' Barros said. ``Anything can happen.''

                                    © 2001