East West Debt, solving defaulted trade and bank debt

East-West Debt march 2003 news, update : BRAZIL

Brazil.

Brazil's economy has endured a fall out from the Argentine crisis and the global economic slowdown. The country's financial markets and its currency, the real, have been tumbling over the past few months. This is despite the fact that the IMF and other global finance officials have argued that the Brazilian economy is basically sound. As a result, the real has lost some 30% of its value against the dollar in 2002 and Brazil's economy has stopped growing. Moreover, very little growth is expected in 2003. In order to stabilize South America's largest economy, the IMF gave formal approval to a $30.4 billion loan for Brazil. The organization agreed on the 15 month standby credit, which is in addition to a $15.2 billion program approved in 2001.

The loan would be spent in four tranches through 2003. In addition to that, the World Bank is considering to recommend an increase in its aid program. The Bank may add $2 billion to the current economic aid package available to Brazil. The move from both organizations was expected after they reached agreement with Brazil on the new loan. This agreement is designed to hold the Brazilian government to the current fiscal targets over the next three years.

The massive IMF program requires Brazil to maintain its target of achieving a primary budget surplus equal to at least 3.75% of GDP in 2003. The target is to be reviewed each quarter. Brazil's budgetary guidelines for 2004 and 2005 must keep the same target or do better. Moreover, the IMF agreed to free up another $10 billion in Brazil. This will be achieved by loosening an agreed position on how much the country must keep in reserves. Brazilian economy is slowly accelerating though. This is because Brazil has implemented strong and consistent macroeconomic policies in recent years. That, in turn, has improved fundamentals and so primary surplus in the public sector increased significantly. Also the strengthening of fiscal institutions, along with the successful transition to a floating exchange rate regime and inflation targeting, have laid the foundation for sustainable growth with price stability.

Despite these achievements, the uncertain international economic environment has put substantial pressure on financial variables, including the exchange rate and interest rates. Consequently, economic growth has slowed down in recent months. In addition, the depreciation of the exchange rate has led to an increase of debt in comparison to GDP. Generally, the macroeconomic situation of Brazil has considerably improved even though economic growth was low. For the year 2002, the trade balance is expected to show a surplus of at least $12 billion. The rapid turnaround in exports has been a key driver of this improvement. This reflects both the impact of the depreciation, productivity growth and the opening of new markets. As a result, the current account deficit is expected to fall by more than half a percentage of GDP, from 4.5% in 2001 to below 2% in 2002 and 2003. Real output growth is expected to reach 1.5% in 2002 and to recover up to 2.5% in 2003. Brazil's monetary policy is committed to meet the 2003 inflation target of 6.5%.

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