SAO PAULO, Brazil (Reuters) -- Brazil may have carried out one of the
developing world's first successful devaluations, but its economic troubles
are far from over.
For years many analysts said devaluation would be the answer to Brazil's
sluggish economic growth that has swelled unemployment lines and forced
millions of families to eke out a living on the street.
They argued a weaker currency would allow sky-high interest rates to fall
and exports to grow, generating new jobs for Brazil's fast-growing, young
But far from ushering in a new period of rapid growth, the devaluation
Brazilian real is widely seen as aggravating a recession that was already set
to cripple the world's eighth-largest economy this year.
"Historically, devaluations are very negative for the economy in the
short-term," said Carlos Kawall, chief Brazil economist for Citibank. "We
expect the economy to shrink by 5 percent this year, compared to a 3
percent contraction we forecast prior to the devaluation."
If Kawall is right, it would be Brazil's worst economic performance in
last three decades.
A strong real, backbone of the anti-inflationary Real Plan, gave Brazil
period of economic stability in years after its launch in July 1994. The
currency helped lift millions of Brazilians out of poverty simply by stopping
hyperinflation, which boosted their purchasing power.
But Brazil's economy paid a heavy price for a strong currency, growing
yearly average of 2.8 percent beginning in 1994, well below the
government's original target of a steady 5 percent growth rate by the year
As a result, official unemployment now stands at about 8 percent, heading
for 10 percent to 11 percent in 1999. The unofficial jobless rate, which
includes workers not officially registered as unemployed, is seen passing 20
percent in 1999.
Most Brazilians have survived in this tight job market by swarming into
informal economy, where they make a living shining shoes, selling gum and
cleaning car windscreens at traffic lights.
Some estimates say 40 percent of Brazil's working population earns its
income in the informal sector.
Unable to control its own spending over the past four years, the Brazilian
government was forced to keep interest rates high to attract dollars in its
relentless bid to support the real. Brazilian interest rates averaged more than
20 percent and often topped 40 percent in the period.
Now that the real has weakened, however, economists say Brazil still has
little room to lower rates from a current 30 percent.
Policy-makers-- including International Monetary Fund officials who
brokered a $41.5 billion bail-out package for Brazil last year-- believe high
rates are essential to maintain market faith in Brazil's new "free float"
Inflation is also expected to rise to about 7 percent from zero in 1998,
will limit the space for a rate cut.
Essentially, high interest rates will remain until Brazil's Congress
demonstrates it has the stomach to pass unpopular austerity measures,
"The devaluation seems quite successful compared to Mexico's and South
Korea's, but it doesn't resolve the problem of our big budget deficit," said
Marcel Allain, chief economist at BMC Bank in Brazil.
Even if congress comes through quickly with fiscal austerity and rates
the belt-tightening at the federal level will still keep a lid on economic growth
by cutting investment and consumption, analysts say.
Copyright 1999 Reuters.