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Brazilian President-Elect Brings Hope, but also Jitters to Weak Economy - 2002-10-30


The victory of a leftist president in Brazil Sunday has made investors nervous about the future and direction of the country's economy. President-elect Luiz Inacio Lula da Silva has pledged he will honor Brazil's financial commitments and pursue anti-inflationary policies, but that hasn't calmed jittery investors.

Voters in Brazil gave President-elect da Silva 61 percent of their vote in Sunday's election and a strong mandate to fix the country's flagging economy. As the first left-wing politician in decades to be elected president, Mr. da Silva is expected to change some of the economic policies pursued by current government.

Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, is an expert on Latin American economy. "The [president's] Workers' Party has an economic program that is different. They want to lower interest rates, they want to promote growth more by promoting domestic industries and agriculture; they want to provide some food stamps and food assistance to the poorest people in Brazil. All those are important changes," he said.

In his first speech as president-elect, Mr. da Silva vowed on Monday he will put Brazil's financial turmoil under control and restore growth to the world's ninth largest economy. He called on international lenders like the International Monetary Fund to help Brazil through its crisis, and on banks to restore credit lines to Brazilian companies.

Mr. da Silva said the priorities for his administration will be job creation and reform of the social security and tax regimes. He pledged to honor the country's debt obligations.

But the long-time opposition leader's coming to power has provoked uneasiness in Brazil's markets and among overseas investors. Brazil's currency, the real, sank as low as four to one against the U.S. dollar before regaining some ground, and the main stock index plunged to three-year lows. Early estimates show foreign investment this year is one-third down from last year.

Many are worried that Mr. da Silva will mismanage Brazil's economy and blunder toward default on the nation's $260 billion debt. But John Williamson, Senior Fellow at the Institute for International Economics in Washington, believes Mr. da Silva will try to avoid a default. "Chances are that he will appoint an economic team that will represent a fair measure of continuity and attempt to get out of this crisis without debt default. And we have to wait to see how the market receives that," Mr. Williamson said.

The credit rating agency Standard & Poor's primary analyst for Brazil, Lisa Schneller, also does not see a debt default by Brazil coming. "The government has resources at its disposal to meet domestic payments over the near term. It has ample external liquidity at the moment to meet limited external interest and amortization payments that are due, for example, this year and early next year. It has the availability potentially of additional IMF resources. So, there are funds available in the near term to manage the financial pressures," Mr. Schneller said.

But foreign capital continue to flee the country and regional markets are worried about the prospect the world's fourth largest democracy shifting to the left. Latin America expert John Williamson says investors are nervous because debt default by Brazil could trigger rippling effects in neighboring countries.

"It is going to make people even more reluctant to hold local assets, it is going both to discourage foreign investment flows in and promote capital flight from the region. And that is going to make it much more difficult to manage the economy in a satisfactory way, and lead to the danger of a generalized slump in the region," he said.

U.S. companies, the largest single source of foreign investment, pumped nearly $3 billion into Brazil's economy last year and they will be watching closely what Mr. da Silva will do after he is sworn in as president next January.

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