The Washington Post
September 15, 1998
As Brazil's Economy Slumps, President's Popularity Soars

                  By Anthony Faiola
                  Washington Post Foreign Service
                  Tuesday, September 15, 1998; Page A15

                  SAO PAULO, Brazil, Sept. 14 Here in Latin America's largest nation, the
                  Samba Days have lost their rhythm. In the past few months, unemployment
                  has increased steadily and booming economic growth has screeched to a
                  halt. In the past week alone, interest rates have almost doubled to 50
                  percent as Brazil bleeds $1.5 billion a day in fleeing foreign investment.
                  The government, meanwhile, has been forced to make emergency spending
                  cuts, and more belt-tightening measures are expected this week.

                  So, with the world watching anxiously to see whether Brazil becomes the
                  biggest casualty yet in the global economic crisis, one might think
                  Brazilians are looking for a change in the presidential election two weeks
                  from now, right?

                  Wrong. In fact, unlike Russian President Boris Yeltsin or Indonesia's
                  ex-president Suharto, Brazilian President Fernando Henrique Cardoso,
                  who took office in 1994, enjoys such enormous popularity in this
                  continent-size nation of 160 million people that polls say he may receive
                  more votes than all his opponents combined on Oct. 4 enough for an
                  outright win without a runoff.

                    The key to why is as simple as the basket of vegetables in Julia Vilela's hands.

                  "Oh, life before Fernando Henrique" most Brazilians call Cardoso
                  by his given names "was nightmarish!" exclaimed Vilela, 58, a nursemaid
                  buying celery, onions and guava at an outdoor market in Sao Paulo,
                  the world's third-most-populous metropolis, after Tokyo and Mexico City.
                  "He made our money worth something. He stopped that horrible inflation
                  and made our [economic] situation stable. . . . I think he's the only one who
                   can put us back together again."

                  A former admirer of Karl Marx turned diehard capitalist, Cardoso reigns
                  as Brazil's economic hero because of his success in ending hyperinflation,
                  once so extreme that prices for food or furniture could double in the time it
                  took to cash a paycheck. He did it with his Real Plan in 1994, which
                  pegged the Brazilian currency, the real, to the U.S. dollar. At the same
                  time, he opened the economy to foreign investment and moved to privatize
                  state-run industrial dinosaurs.

                  The plan helped Brazil's vast number of poor most of all, and today they
                  desperately fear a return of hyperinflation. Making up about 40 percent of
                  the population, the poor were the least likely to keep their money in
                  interest-bearing accounts, which profited from the rising interest rates that
                  accompanied inflation. Also, as the economy stabilized and the real's value
                  solidified, stores began offering credit to the poor to buy such products as
                  microwave ovens and televisions for the first time.

                  At the same time, Cardoso managed, until very recently, to become the
                  darling of international investors, with Brazil luring more direct foreign
                  investment than any developing nation except China.

                  But now Cardoso finds himself desperate to preserve his Real Plan,
                  currently in greater jeopardy than during any period of his presidency. The
                  key index on the stock market in Sao Paulo, the financial capital of Latin
                  America, has lost 40 percent in the past 30 days.

                  That happened as foreign investors, chastened by Russia's economic
                  collapse, have taken a new, skeptical look at the plan, concluding that
                  while it may have licked inflation, it did so at the cost of inflating the value
                  of the local currency on world markets, ballooning the trade deficit and
                  increasing public debt to a whopping 7 percent of gross domestic product.

                  Even though the banking system here is far more solid than in troubled
                  East Asian countries or Russia seven of the 10 largest local banks are
                  owned by U.S or European banks many still see this nation as
                  vulnerable. Today, Brazil needs $50 billion a year in foreign investment to
                  cover its debt, although it still maintains cash reserves greater than that.

                  An economic collapse here would be far more costly to the international
                  community than any to date, including Russia's. U.S. companies have
                  more than $26 billion invested here, and it would hit Wall Street especially

                  Investors are taking a hard line on Cardoso's inability to deliver the type of
                  sweeping governmental reform he has promised for years, including
                  politically unpopular overhauls of the extraordinarily generous social
                  security system and labor laws.

                  "The problems here aren't just because of panic from Russia and Asia; it's
                  because Cardoso has failed time and time again at making institutional
                  reforms, and he has also tried his best not to be upfront about his failings,"
                  said Alexandre Barros, a Brasilia-based political analyst. "He is doing
                  what is politically best for him, not for Brazil."

                  Indeed, rather than devaluing the currency a move that surely would
                  trigger a politically damaging surge of inflation right before the election
                  Cardoso has encouraged the Central Bank to increase interest rates to
                  dizzying levels, a tactic that is sustainable only for a short time before the
                  Brazilian economy would dive into a deep recession that likely would take
                  the rest of Latin America with it.

                  Cardoso also has belatedly slashed government spending mostly in
                  transportation and environmental programs and likely will be forced to
                  take even bolder measures as international pressure on Brazil continues.

                  In an almost uncanny way, however, he has maintained deep popular
                  support. Brazilians seem to believe that because he has proven his ability
                  to cope with crises in the past, he may still find a way to guide the country
                  to safety again. He remains, for most people here, the brainy, multilingual
                  intellectual who made Brazil respected on the world stage and
                  strengthened its democracy while making it an economic force to be
                  reckoned with.

                  "I know we're going through a bad time now, but Fernando Henrique is
                  the reason I have my car," said Adelcio M. da Silva, 43, a Sao Paulo taxi
                  driver who bought his used Volkswagen on loosened credit two years
                  ago. "And I'm not going to give up on him."

                  Helping Cardoso is a slick, American-style presidential campaign
                  designed by noted Brazilian marketer Nizan Guanes. Cardoso's TV ads
                  feature celestial music tinkling in the background as he extols his
                  experience at dealing with crises a far cry from the donkey-riding,
                  man-of-the-people campaign that helped get him elected four years ago.

                  Meanwhile, Cardoso has done and said everything possible to encourage
                  the view of himself as an economic savior, even as the walls crack around
                  him. "Look, if things are difficult, it's better to hand over [power] to him
                  who has competence to handle these types of problems," Cardoso told
                  reporters during a campaign trip this weekend. "Why would anyone give it
                  to somebody else who doesn't know how to handle it? People should give
                  it to somebody who has experience."

                  Cardoso's vast support, experts say, also stems from a weak opposition.
                  Luiz Inacio "Lula" da Silva, a perennial candidate with socialist leanings, is
                  his only real rival and voter preference polls show him with less than half
                  of Cardoso's 43 percent rating. "The people don't see Lula as a credible
                  alternative, especially while Brazil is under assault by international
                  investors," said political economist Ladislau Dowbor. "If things are bad
                  right now with Cardoso, the people fear all-out chaos if Lula were

                  A one-time factory worker, da Silva has been stung by the fact that the
                  people who typically make up his largest voter base are supporting his
                  opponent in droves. "Cardoso has support from virtually every income
                  group, but he's strongest among the poorest people," said Mauro Paulino,
                  director of DataFolha, a major Brazilian polling firm. "That's a direct fear
                  of inflation returning."

                  The pressure on Brazil will continue, experts say, although many predict
                  that an International Monetary Fund offer of a line of credit which Brazil
                  has yet to accept will help Cardoso at least through the election unless
                  there is a sudden, massive assault on the real.

                  The ultimate question for Brazil, however, is this: What is Cardoso
                  prepared to do after the election? "After the election, he is going to have
                  to show investors that he is actually making the reforms he's talked about,"
                  said Mauro Schneider, vice president of ING Bank in Sao Paulo. "If not, I
                  don't want to speculate, but things will get even harder here."

                           © Copyright 1998 The Washington Post Company