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Brazil: Seeing Dollar Signs


Brazil: Seeing Dollar Signs

Brazilian banks are betting in a growing economy for 2004.
At the same time, some Lula’s
economic advisers have been
warning the President that the continuous devaluation of the
dollar represents
a danger to the economy. A group of
businessmen want an exchange of around 3
reais per dollar.

by:
Alessandra Dalevi

 

If this past Tuesday is any indication, Brazil will see another week of bright economic news and shattering of records.
The world continues betting that the country is going to grow and that Lula and his team are adopting all the right and
necessary measures in order for this to happen. Behind all this commotion was the belief that Fitch Ratings will be revising up, in
the near future, Brazil’s credit ratings.

That international rating agency released its quarterly report for Latin America in which it praises President Luiz
Inácio Lula da Silva and the pension reform he was able to have approved in the Brazilian Congress. Roger Scher, director for
Latin America’s sovereign debt of Fitch, noted that Brazil is expecting a trade surplus of US$ 20 billion and stressed that the
drop of the inflation will allow "a loosening of the monetary policy which might be able to sustain a robust economic
recovery in 2004."

The Brazil risk fell 4.63 percent to 576 points, the best result since July 1998. The Brazilian C-Bond, the country’s
most traded bond, was being sold at a record 94.62 percent of its face value. The Brazil-40, another Brazilian bond, was
traded for its full value before falling to 99 percent of its face value.

According to Rafael Guedes, executive director of Fitch Atlantic Ratings, it’s too early to know what his agency is
going to do: "We are faster than the other agencies. We usually position ourselves first, be it for improving or lowering the
rating. But there isn’t anything concrete yet to prompt an alteration now."

Brazil’s sovereign rating has got a B from Fitch. Mexico and even Colombia and Peru have a better rating. Since
June, however, the agency has given signs that it is considering an upgrade for Brazil. Such an upgrade would make life much
easier for entrepreneurs, banks and the government, which would be able to get foreign loans with more attractive interest rates.

Brazilian banks are betting in a growing economy for 2004. At the same time, some Lula’s economic advisers have
been warning the President that the continuous devaluation of the dollar in relation to the real represent a danger to the
economy. A group of businessmen from the Council of Economic and Social Development prepared a document called New
Agenda of Economic Development and Proposals for Growth Resumption in which they suggest that the government maintain
exchange rates "compatible with the present effort to export and the reduction of the foreign vulnerability in other to guarantee
competitiveness for the national economy and obtain high commercial surpluses."

For Benjamin Steinbruch, president of the Companhia Siderúrgica Nacional (CSN), the largest steel complex in
Latin America, Brazilian companies will not be able to guarantee the growth of exports with the dollar under R$ 3.10. The
president of Fiesp (Federaçao das Indústrias do Estado de São Paulo), Horácio Lafer Piva, echoed the same idea, saying the ideal
would be to maintain the exchange rate at 3 reais for 1 dollar.

The dollar continued going down and closed at R$ 2.83 per dollar, the third lowest position this year. The drop was
due to the operations of Brazilian exporters and the entry of foreign private capital in the country. According to brokers, a
number of investors who bought dollars in the morning reversed their positions in the afternoon.

The São Paulo Stock Market stayed above 18,000 points and closed 0.64 percent up, the best level since March
2000. More than US$ 300 million were traded. A good share of this money came from 7,400 foreigners who have invested
close to US$ 2 billion dollars this year in the Bolsa de Valores de São Paulo (Bovespa). When computed in dollars, stocks
have risen more than 100 percent this year alone.

According to Agência Brasil, Brazil’s trade balance registered a US$ 611 million surplus in the second week of
October (6 to 12), the result of US$ 1.780 billion in exports and US$ 1.169 billion in imports. For the month, foreign trade
shows a surplus of US$ 1.066 billion, with sales of US$ 2.812 billion and purchases of US$ 1.746 billion.

So far this year, the trade balance has accumulated a US$ 18.868 billion surplus. Exports stand at US$ 55.602
billion, and imports, US$ 36.734 billion. This information was released by the Ministry of Development, Industry, and Foreign Trade.

Still, according to AB, the Brazilian inflation should amount to 9.68 percent in 2003. This is the forecast made in the
Focus Bulletin, published by the Central Bank and based on a survey of financial consultants and institutions. Compared with
last week, this expectation remained unchanged. However, with regard to next year, the forecast for inflation fell slightly,
from 6.20 percent last week to 6.10 percent.

In the short run, on the other hand, the market believes that this month’s inflation, as measured by the IPCA (Broad
Consumer Price Index) will surpass its initial estimate of 0.53 percent, made last week, and finish the month at 0.55 percent. The
estimate for November is 0.50 percent.

Expectations are very good in relation to the trade balance, which should close the year with a US$ 21.4 billion
surplus; foreign direct investments should rise from US$ 8.65 billion to US$ 9 billion; the exchange rate should stand at R$ 3.05
per dollar at the end of the year, as against the R$ 3.10 projected last week; and, for the first time since 1992, current
accounts should close the year in the black, with a US$ 500 million surplus. On the negative side, the ratio between net
government debt and the Gross Domestic Product (GDP) should increase from 56.46% to 57%, according to market expectations.

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