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Attacks May Harm Latin American Economies - 2001-09-16


Like other Latin American nations, Brazil is bracing for potentially negative economic repercussions from Tuesday's terrorist attacks in the United States. Economists say they are concerned that investor confidence and capital flows to Brazil and to the rest of Latin America may be affected.

Brazil's currency has sunk to new lows against the U.S. dollar during the past few days, in reaction to uncertainty about the future of the economy in the wake of Tuesday's terrorist attacks in New York and Washington.

The Brazilian economy was already slowing this year, affected by continuing high interest rates, balance of payments difficulties, an energy crisis, and other domestic factors. It also has been affected by external developments, such as the slowdown in the U.S. economy. The Brazilian economy, which at one time was projected to grow by four percent this year, is now likely to expand by just 2.5 percent.

Now, in the wake of Tuesday's attacks, economists like Antonio Carlos Porto Goncalves believe the economies of Brazil and the rest of Latin America will suffer even more. "These terrorist acts may threaten consumer confidence and investments in the United States, making it more difficult for the American economy to avoid a recession," he said. "This, in turn, will affect Latin America, making it more difficult for us to maintain our rhythm of growth. International investors are likely to be less tempted to invest in Latin America, and this will lead to a deterioration in capital inflows."

If U.S. consumer confidence drops, purchases of goods, including those made in Latin America, also could fall. But economist Porto Goncalves, who is the director of Brazil's Economic Institute at the Getulio Vargas Foundation in Rio de Janeiro, is not too concerned over the impact on Brazil of a potential decline in exports to the U.S. market.

"Brazil's exports to the United States represent about 30 percent of its total exports," he said. "But exports account for only ten percent of Brazil's gross domestic product, so exports to the United States represent only about 3.5 percent of GDP. It wouldn't be catastrophic then, if a big client of ours stops buying, because its purchases represent such a small percentage of GDP. I think what is more worrisome is the potential impact on capital flows and investor confidence."

This has yet to materialize, as investors continue to asses the potential impact of the attacks on the U.S. economy. But Brazil is potentially at risk, since it will need external financing to help pay off an estimated $3.2-billion in public and private debt during the next 12 months.

In the meantime, the government of President Fernando Henrique Cardoso is taking action to stop the slide of the Brazilian currency. The Brazilian central bank has intervened over the past two days to prop up the Brazilian currency, the "real," by selling dollars on the open market. Despite this, the "real" continues to sink to record lows.

However, President Cardoso said Tuesday, his government will continue taking these actions to protect Brazil from the potential economic fallout of the terrorist attacks. "We will act firmly, and with serenity to overcome the turbulence that could affect our countries, including Brazil, and by turbulence I'm referring economic ones, given the fact that our nation is far from the conflict," he said.

Brazilian Finance Minister Pedro Malan says it is still too early to tell what the economic consequences of Tuesday's devastating events will be. Speaking to a congressional commission Wednesday, he acknowledged the attacks are likely to aggravate the difficulties facing the world economy. But he expressed optimism that Brazil is in condition to overcome whatever problems may arise.

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