CLOUDS GATHER AS GDP GROWTH EASES

Global Finance, Dec 2004 by Fittipaldi, Santiago

EM ROUNDUP

BRAZIL

Despite positive news surrounding Brazils economic recovery, analysts predict the boom will soon be tempered. GDP growth, likely to end 2004 at 4%-4.5%, is expected to come in at a more modest 3.5% in 2005, as a result of monetary tightening, high oil prices and a potential global economic slowdown that will not bode well for Brazilian exports. Growth will be supported by recovering income levels and new investment flows. During a Latin American tour in November, Chinese President Hu Jintao pledged up to $8.5 billion investment.

The government continues to get high marks for its economic policies. An IMF delegation recommended approval of the ninth revision of its agreement. If approved, Brazil would qualify for another $1.4 billion tranche, but is unlikely to use it. It has not made any withdrawals after recent reviews. The government does not expect to renew its IMF pact next year but vows to continue posting primary surpluses.

A frequent issuer on international capital markets in dollars, the Brazilian government has decided to launch its debut eurobond issue denominated in reals-setting a new benchmark. Rumors in November were for the sovereign to come to market with a five-year deal for the equivalent of $350 million. The strategy should further boost hard currency reserves, as local currency deals will help reduce dollar debt exposure.

Not all is well for President Luiz Inacio "Lula" da Silva, however. The government's political coalition is showing signs of deterioration, as members have threatened to withdraw over controversy surrounding central bank governor Henrique Meirelles. Political leaders are up in arms over Lula's proposal to elevate Meirelles to a ministerial level. Meirelles, currently involved in a scandal over alleged tax evasion, would receive partial immunity as a cabinet member.

-Santiago Fittipaldi