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Argentina spill-over forces further interest rate
hike. The pace of the Real depreciation continued to quicken
in July, with the currency losing another 5.2% of its value relative to
the US$, following the 2.4% loss in June. The Real has now depreciated
19.6% relative to the US$ since December 2000, well in excess of the 1.7%
anticipated by the market at the beginning of this year. In mid-July, the
Real broke through the 2.50 to the US$ threshold and has since remained at
that level to reach 2.48 Reais to the US$ on 10 August. Concerned about
the more accelerated depreciation and the potential pass-through on
domestic prices, the Central Bank decided to raise the benchmark SELIC
interest rate for the fifth time this year. The Central Bank’s 75 basis
point hike on 18 July, from 18.25% to 19.0% brought interest rates to a
22-month high and is likely to put additional downside pressure on the
economy, already suffering from the slowdown prompted by energy rationing.
This month’s Consensus Forecast reflects the
current exchange rate scenario. Panellists expect the Real to recover
some of the lost value in the coming months but to close the year at a
higher level than in last month’s publication. Monetary policy is likely
to continue to be determined by developments in the exchange rate market.
While panellists expect interest rates to come down from their current
levels, they have hiked last month’s forecast year-end SELIC rate.
Government moves to garner IMF support.
The pronounced weakening in the Real prompted the Central Bank to
intervene in the foreign exchange market throughout most of July. As a
result, international reserves dropped by US$ 1.7 billion. Growing
concerns for a more protracted crisis in Argentina and the resulting
slowdown in capital flows to the region impelled the Brazilian government
to request additional funds from the International Monetary Fund (IMF).
On 3 August, the IMF gave an initial approval for a new US$ 15 billion
stand-by credit through December 2002, of which US$ 4.6 billion may be
made available as early as September. Government officials hope that the
IMF support will help minimize potential Argentina contagion by bolstering
liquidity and aid in boosting investor confidence over policy continuity
after the October elections.
Under the terms of the new IMF agreement the
government agreed to apply more fiscal stringency by raising the primary
fiscal surplus for this year to 3.35% of GDP (up from 3.0% established in
an earlier agreement) and further to 3.5% of GDP in 2002. Since the
government has vowed not to raise taxes further, the adjustment will have
to come from spending cuts. The Central Bank will be enabled to lower the
current minimum international reserve requirement (a minimum foreign
reserve level that the Central Bank promises to maintain according to the
IMF accord) from US$ 25 billion to US$ 20 billion and has committed to
maintain the current inflation targets. Following the Central Bank’s
downward revision in June, the government has also lowered its economic
growth projections for this year to 2.7% from 4.5%. Additionally, the
government also announced that growth is expected to expand more
favourably at a 3.5% pace in 2002.
Growth strong in first half but to slow
significantly. GDP growth for the first quarter of the year
has been revised upward by the National Statistics Institute (IBGE) to
4.1% from 3.8%, year on year. But the Central Bank has cut its 2001
growth forecast as a result of energy rationing and rising interest
rates. Industrial production data indicate that economic activity is
slowing. IBGE reports that industrial output declined 1.4% in June over
the same month last year, the first decline in 24 months, and that
seasonally adjusted data show that monthly activity dropped 1.1% in June
over the previous month.
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