I don't know anything about the current state of the Brazilian economy. But Ted Truman does. And he favors the policy of having the IMF commit another $30 billion in loans to Brazil.
The way Truman sees it, the last round of IMF loans--in 1998--gave Brazil the breathing room to almost bring its government finances into balance. But it was not quite enough. And now Brazil needs to do more.
Doing more, however, requires time: time for Brazilian politicians to face up to the situation and get their policies in order. Without IMF loans, Truman believes, Brazil will have no time--and the expectation that it won't get its policies in order will instantly destroy the high probability that, with six months of grace, Brazil will be able to avoid the high inflation that is an effective governmental bankruptcy.
The Brazilian economy remains vulnerable. The ratio of public-sector debt to gross domestic product rose from 34 per cent in 1997 to 49 per cent in 1999 but has now increased to 55 per cent when it was projected to be on a declining trend. Less than 20 per cent of public sector debt is held abroad but a similar proportion is linked to the dollar. Brazil's total external debt, which is less than 50 per cent of GDP, is primarily private-sector debt. However, the total is more than 310 per cent of exports of goods and services. These ratios put Brazil in the danger zone of debt sustainability.
The country's real growth rate, which was 4.4 per cent in 2000, declined to 1.5 per cent in 2001 as a consequence of the global slowdown; prospects are dim for a pick-up this year. Brazil's current account deficit has averaged 4.4 per cent of GDP for four years and the economy is still relatively closed: exports of goods and services are 13 per cent of GDP. Last, it is located in a bad neighbourhood. Foreign and domestic investors are concerned--not unreasonably--that Brazil will follow Argentina into external and internal default and economic and financial chaos. These facts are not reassuring. The next Brazilian administration needs to act quickly...
by Edwin M. Truman, Senior Fellow
Institute for International Economics
Op-ed from the Financial Times
June 25, 2002
© Institute for International Economics
Brazil and the international financial community face an unpleasant challenge. Once the World Cup is over, the Brazilian electorate will discover that their presidential election campaign has increased uncertainty about Brazilian economic and financial policies and triggered a flight from Brazilian assets. How Brazil and the international financial community respond will have profound implications for the entire international financial system.Four years ago, under similar domestic political circumstances and external financial uncertainty, the Brazilian authorities unsteadily manoeuvred through an external financial crisis. They abandoned their rigid exchange-rate regime, achieved a substantial shift in Brazil's consolidated primary fiscal surplus and stabilised the economy. Can they do it again?
The Brazilian economy remains vulnerable. The ratio of public-sector debt to gross domestic product rose from 34 per cent in 1997 to 49 per cent in 1999 but has now increased to 55 per cent when it was projected to be on a declining trend. Less than 20 per cent of public sector debt is held abroad but a similar proportion is linked to the dollar. Brazil's total external debt, which is less than 50 per cent of GDP, is primarily private-sector debt. However, the total is more than 310 per cent of exports of goods and services. These ratios put Brazil in the danger zone of debt sustainability.
The country's real growth rate, which was 4.4 per cent in 2000, declined to 1.5 per cent in 2001 as a consequence of the global slowdown; prospects are dim for a pick-up this year. Brazil's current account deficit has averaged 4.4 per cent of GDP for four years and the economy is still relatively closed: exports of goods and services are 13 per cent of GDP. Last, it is located in a bad neighbourhood. Foreign and domestic investors are concerned—not unreasonably—that Brazil will follow Argentina into external and internal default and economic and financial chaos. These facts are not reassuring.
The next Brazilian administration needs to act quickly. A successful programme requires a primary fiscal surplus at least one percentage point higher than the 3.75 per cent of GDP to which the current administration is now committed; this will involve additional reforms of the pension system and a comprehensive overhaul of the tax system. Tighter fiscal policy should contribute to lower real interest rates and an increase in investment. At the same time, the central bank must also be allowed to maintain a policy anchored in the current inflation-targeting framework.
Last, the Brazilian authorities will also have to deal with the lack of internal and external competitiveness of the Brazilian economy. A pick-up in its abysmally lowinvestment rate should help but that, in itself, is not enough. None of this will be put in place during Brazil's election and transition over the next six months. In the meantime, what should the official international financial community do?
Last September, the International Monetary Fund granted Brazil a $15.7bn (£10.7bn) stand-by arrangement in the context of the unfolding Argentine tragedy. Brazil has now drawn most of it. The IMF appropriately has relaxed its constraint on the use of Brazil's reserves to cushion the impact on the Real of attempts to hedge Real exposures.
In future, IMF management and the main creditor countries should not heed the calls of the moral-hazard fanatics or those who favour experimentation in the name of systemic improvement. Instead, they should stand ready, if necessary, to support substantial additional resources for Brazil and to relax further constraints on the use of Brazil's gross foreign exchange reserves.
In return for additional assistance, the IMF should seek a written commitment from the leading presidential candidates on the policies their administrations would follow, should they win. That commitment should avoid specifics but it must encompass four crucial elements. First, the next administration must increase the primary surplus by at least 1 percentage point of GDP until the ratio of public debt is reduced to, say, 45 per cent of GDP. Second, it must increase the domestic and international competitiveness of the Brazilian economy to reduce its external debt. Third, it has to maintain a realistic inflation—targeting monetary policy framework. Last, it should make prudent use of international reserves to cushion downward pressures on the Real but without targeting a particular exchange rate.
In the absence of such commitments by the leading presidential candidates and support from the official international financial community through the IMF, Brazil may be forced to default on its domestic and international obligations either before the end of 2002 or soon thereafter. That is a risk not worth taking.
Posted by DeLong at August 11, 2002 08:07 PM | TrackbackGood to see you back -- and in midseason form at that.
Posted by: Paul on August 11, 2002 08:31 PMDoing more, however, requires time: time for Brazilian politicians to face up to the situation
The current crisis in Brazil was triggered by fears the *voters* would install a leftist government, not by fear over the current government's policies.
The 40% plunge in Brazil's C-Bonds from April through July reflected concern a new "Lula"/left administration, which could come into power this Fall, wouldn't honor debt commitments.
Posted by: George Zachar on August 12, 2002 05:50 AMLots of good sense here ... I've always had a soft spot for Truman (as opposed to the rest of the IIE gang). A few comments:
1.) the "$30bn loan" consists of $6bn this year, plus the rest in small tranches during 2003, if whoever is elected keeps to the primary surplus targets. This is not exactly your classic Walter Bagehot lender-of-last-resort principles (lend freely against good credit, at a penal rate). What the IMF appears to be doing is lending in a niggardly fashion, at markket rates.
2.) Truman's support of something very like what turned out to be the programme, is pretty well open to Stiglitz' critiques of IMF programs in general; that they advocate procyclical fiscal policy. A 3.75% (per program) primary surplus, or even a 4.75% (per Truman) one, is a hell of a thing to have to produce in a downturn. And I for one am unconvinced that the usual argument in favour of these fiscal elements ("market confidence") is valid; does anyone really think that there is a wall of money out there just waiting to invest in Brazil if fiscal austerity is harsh enough?
3.) (and this follows on from my unstructured rant about the Japan article above), what the hell does "competitiveness" have to do with all of this? Sure, competitiveness, privatisation, labour market reforms, etc, are all very nice things. But they're slow acting and Brazil is in a situation in which *crisis management* is called for. Now is not the time for anyone's energy or political capital to be taken up tinkering with institutional arrangements. It's going to be a darn sight more difficult to reform corporate governance and boost competitiveness in Brazil if the local middle class are all reduced to bartering for food because their deposits are stuck in a bloody corralito!
Posted by: dsquared on August 12, 2002 05:54 AMBlogStat: Thread on verbose, slender, leggy blonde is three times the length of this thread: one about a major world economic issue.
Posted by: George Zachar on August 12, 2002 05:53 PM'Thread on verbose, slender, leggy blonde is three times the length of this thread'
Comments are caused by a) disagreement and b) feeling of qualification to comment on the issue.
Posted by: Jason McCullough on August 12, 2002 07:41 PMBenchmark Brazil against the US on fiscal policy, current account deficit, exchange rate policy, etc. and I think it shows that the advantage the US has is simply that it can issue its own currency to pay for imports (because the USD is the choice currency of reserve).
In other words, Brazil has not done too badly. Small external sector? If you look at the history of the US, back into the 19th century, exports have never been a big motor. Large economies grow on their own, self perpetuating, growth in individual consumption. The Japan/ South Korea model is an historic abberation (and a dangerous one: the 1960-1990 period was an extraordinarily favourable one for trade led economic growth).
Arguably Brazilians could save more (so could Americans).
Brazil is being punished by the structure of international capital markets. At the real interest rate prevailing, Brazil cannot grow itself back into a stable debt/ GDP position (nor should a developing country run huge surpluses relative to GDP, when infrastructure, both social and physical, is so deficient).
Default and restructuring is inevitable. The $30bn should have been used to manage that process less painfully, rather than putting off the inevitable. My (ill informed) guess is that no feats of fiscal policy can save Brazil now.
Stiglitz is right, that old aphorism 'how can thy see the mote in thy brother's eye, and miss the sawn plank in thine own?' is absolutely right.
Posted by: John on August 14, 2002 03:19 AMStigltz is right indeed. Suggest a look at the Siglitz essay for the NY Times - Aug 14.
Posted by: on August 14, 2002 11:09 AM>>Truman's support of something very like what turned out to be the programme, is pretty well open to Stiglitz' critiques of IMF programs in general; that they advocate procyclical fiscal policy...<<
Well, they're not supposed to advocate procyclical fiscal policy. They're supposed to advocate a stable debt-GDP ratio over the cycle, with deficits in recessions and surpluses in booms.
Somehow, however, the High Politicians at the IMF never seem to push hard enough for the surpluses during the booms, and then when recession comes and people begin thinking about rising debt, unpleasant monetarist arithmetic, and hyperinflation, they panic and start demanding larger and larger primary surpluses...
Brad DeLong