Re: El Salvador's monopoly capitalism

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Michael writes:

> So now we add El Salvador to the Turkey-Argentina
> nexus.  I wonder what it will take to reach a critical
> mass.  Brazil?

As far as I know, Brazil has not been doing that well recently. I
wonder if there are any Brazilians on this list who would care to
comment on the below Stratfor articles. By the way, I look
forward to hearing more from Frank on El Salvador.

Best,
Sabri

+++++++++++++++++++++

Politics, Currency Worries Create Vicious Cycle in Brazil
5 June 2002

Moody's Investor Services on June 4 cut its outlook for Brazil's
foreign currency debt rating from positive to stable, citing
concerns that the country will have trouble reducing its debt.
The same day, Brazil's currency, the real, hit a seven-month low

The currency slide is likely to continue through the year. The
Moody's cut signals to the markets -- which already are nervous
about a possible socialist victory in October's presidential
elections -- that Brazil's debt problems are a legitimate
concern. A sustained currency slide, in turn, will make the
servicing of foreign debt even more expensive.

The cycle of weakening currency and rising debt will put upward
pressure on interest rates and inflation, creating a drag on
Latin America's largest economy that will present an immediate
challenge for the next president.

The real has tumbled 13 percent in the past two months and is the
fifth-worst performing currency this year among 56 foreign
currencies tracked by Bloomberg. The decline is due partly to
uncertainty over the outcome of the coming presidential election.
Investors worry that the leading candidate, Luiz Inacio "Lula" da
Silva of the socialist Workers Party, will seek budget-busting
social spending hikes that would stoke inflation.

The latest survey by Brazilian pollster Vox Populi, published
June 3 by the Financial Times, shows that da Silva's main
challenger, Jose Serra of the governing Brazilian Social
Democracy Party (PSDB), may be gaining some ground. Support for
Serra was at 20 percent, up from 16 percent in mid-May, while da
Silva's share of the vote dropped from 42 to 40 percent. Unless
the slight gains turn into a strong trend, they will do nothing
to soothe concerns about a da Silva presidency, and currency
worries will continue.

It also is becoming clearer that a Serra victory would be no
silver bullet for Brazil's currency struggles, as the Moody's
rating indicates. No matter who wins the elections, Brazil's debt
load is still likely to climb as provincial governors and
Congress back away from the more austere policies imposed by
current President Fernando Henrique Cardoso. The country's
foreign debt will add to the uncertainty over the real's future.

That future is of particular concern to Brazilian companies.
Total private sector debt in the country stood at $118 billion in
January, according to Finance Ministry figures. Around $4.8
billion of that will come due between June and August, Bloomberg
reports. Much of this debt is dollar-denominated, and companies
are concerned that the value of their domestic earnings will drop
along with the real, raising the true cost of servicing their
debt. This has led to a rapid flight to currency hedging
products; a Deutsche Bank representative in Sao Paulo said demand
for such products grew 50 percent in May.

Such hedging will become increasingly popular and more expensive
as concerns over the currency and debt loads raise questions
about Brazil's economic future -- no matter who wins the
presidency.

+++++++++++++

Brazil: Investors May Soon See Argentina-Level Problems
9 May 2002

Summary

Despite international investors' fears over the likelihood of a
socialist winning Brazil's next presidential election, the real
dangers to the country's economy will come from opposition and
intransigence by state governors and Congress toward whomever is
leading the country. Within 18 months Brazil could be following
Argentina into a lengthy economic recession and crippling
financial crisis.

Analysis

International lenders and financial markets have reacted
negatively to new polls showing that Brazil's socialist Workers
Party presidential candidate Luiz Inacio "Lula" da Silva holds a
substantial and growing lead five months prior to the October 6
elections. In the past two weeks, leading Wall Street investment
banks such as Morgan Stanley Dean Witter and Merrill Lynch
shifted their recommendations for Brazil from "overweight" to
"market weight," a signal to investors to stop increasing their
exposure in that county.

Brazilian Finance Minister Pedro Malan has said he believes some
foreign investment banks are suffering a case of nerves at the
sight of a socialist -- who has made strong statements condemning
U.S. dominance in the Americas -- leading the country's
presidential race. While Brazil is not at imminent risk of a
financial crisis, any sign of reduced international confidence
will translate immediately into higher interest rates and more
pressure on its currency, especially at a time when neighboring
Argentina's economic and political crisis is rapidly worsening.

Amid their concerns about da Silva, both Malan and Wall Street
are missing the real point about Brazil's next leader. Whoever
replaces President Fernando Henrique Cardoso in January 2003 will
be significantly weaker than was Cardoso, and likely will have
serious difficulties working with a fractious national Congress
and powerful state governors. Whether Brazil's next president is
da Silva or someone more appealing to international investors,
the country's state governors will have a great deal more wiggle
room to evade their fiscal bargains with the federal government,
while Congress likely will be less willing to support the new
president's legislative agenda.

As a result, Brazil's foreign and domestic public-sector debt
likely will begin to climb even before the next president takes
office in January 2003. The rise in Brazil's debt load during
2003 -- as a percentage of both gross domestic product and
exports -- will follow a front-end decline of at least $7 billion
in exports during 2002.

This will skew Brazil's debt-to-GDP and debt-to-exports ratios
and fuel even higher interest rates. High rates will cut into
corporate investments and profits during 2003 and quite likely
the following year as well. By the end of 2003, if not sooner,
Wall Street analysts likely will be seeing in Brazil many of the
same structural problems that predated Argentina's financial
meltdown last December.

Brazil's Finance Ministry and Central Bank claim that the
country's domestic and external debt levels are rational and
manageable. For example, the Central Bank estimates that total
public-sector debt at the end of March 2002 was 680.7 billion
reals, or 54.5 percent of GDP. The federal government accounted
for only 34 percent of the total public-sector debt, with the
balance owed by state and municipal governments and state-owned
enterprises. Moreover, nearly 80 percent of Brazil's total debt
burden is of domestic origin.

Brazil's Finance Ministry also reported that the country's total
external debt at the end of January 2002 was $209.5 billion, of
which $181.7 billion was medium- to long-term debt and only $27.8
billion was short-term debt. The private sector holds 55.9
percent of this external debt, while the non-financial public
sector owes 44.1 percent. However, the government's external-debt
figures don't gibe with the World Bank's estimates that Brazil's
foreign debt totals $237.9 billion.

In fact, Brazil faces a vicious set of debt dynamics that could
only be reversed through an export boom, which is unlikely to
happen for two reasons. First, Brazil mainly exports
price-sensitive commodities or industrial products in areas where
no one wants to liberalize rapidly (agriculture, commercial
aircraft, steel, etc.). And second, while Cardoso has presided
over the longest period of economic and political stability in
Brazil's recent history, the country's economic growth has been
consistently sub-par, due to structural fiscal and legal
deficiencies that its corporate oligarchs and political
establishment are unwilling to reform.

Cardoso insists that Brazil has a healthy economy, but too many
caution lights are blinking simultaneously to accept his
assurances at face value. For example, economists like Gary Clyde
Hufbauer of the Washington, D.C.-based Institute for
International Economics (IIE) note that Brazil's current account
deficit is about 4.6 percent to 5 percent of GDP, the
government's fiscal deficit is nearly 5 percent of GDP and the
country's total debt-to-GDP ratio is increasing about 3 percent
to 4 percent annually.

In 2001, Brazil finally achieved a $2.6 billion trade account
surplus after six years of external deficits and a major currency
devaluation in 1999. However, this achievement was offset by a
$27 billion deficit in services and external debt payments.

Moreover, with 67 percent of the heavily leveraged, high-margin
Brazilian financial system's assets concentrated in just 10
banks, the rapidly growing problem of bad loans at many of the
country's 180 banks could easily spin out of control in 2003 if
relations deteriorate between Brazil's next president, state
governors and national Congress -- as STRATFOR believes is
likely.

The financial system's structural strains are already showing.
Despite moderately improved official growth forecasts for 2002,
Brazil's benchmark interest rate is currently about 18.5 percent,
which is much higher than investors would like. Additionally, the
Central Bank in April raised its official base inflation target
for the second time in two months to between 4.5 percent and 5
percent.

Meanwhile, Brazilian government and corporate borrowers are
already facing tighter international credit markets, as
heightened political risk perceptions drive interest rates
higher, which also places increased pressure on the country's
currency. In fact, the credit-risk agency Fitch currently has a
BB- rating with a negative outlook on Brazil's long-term foreign
currency, and a B+ rating on the country's long-term local
currency.

Brazil needs to achieve sustained growth rates similar to those
enjoyed by Chile during the late 1980s and throughout most of the
1990s -- at least 6 percent to 7 percent annually -- to avoid
falling back into the political instability, hyperinflation and
skyrocketing budget deficits that have undermined the country's
hopes of becoming a leading economic power for over 50 years.

However, in 2001 the economy only grew 1.6 percent and the
Cardoso government expects growth of just 2.5 percent in 2002,
rising to 3.5 percent in 2003. At these sub-par growth rates,
Brazil's next government may find it impossible to keep the
country from following Argentina into a lengthy period of
economic recession and crippling financial crisis.