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The Impact of the Attacks
on the Brazilian Economy
1. Export growth to slow. The recent
attacks in the United States are likely to exacerbate the current downturn
in the Brazilian economy, which has been plagued this year by contagion
from Argentina and a domestic energy crisis. The downturn in US demand
and the expected slowdown in global economic activity are likely to slow
trade flows. In 2000, exports accounted for 9.9% of GDP, 24.3% of which
were directed to the United States (2.6% of GDP). Nevertheless, on the
import side lower oil prices will serve to benefit external accounts,
while the weaker currency may also serve to offset the external demand
slowdown by giving Brazilian firms an additional competitive advantage
over other exporters.
2. Diminished capital flows to region will
increase pressure on current account. Similar to Argentina,
Brazil is likely to suffer the consequences of an investor flight to
quality, which should be reflected in higher borrowing costs in
international markets but could also serve to weaken the currency further.
Increased investor risk aversion could serve to stall foreign direct
investment (FDI) flows, which last year totalled US$ 33.4 billion but are
expected to drop to US$ 19 billion this year, according to Central Bank
estimates. So far, strong FDI has been essential to finance the mounting
current account deficit, which has increased from 4.0% of GDP in August
last year to 4.9% of GDP in August 2001. However, if foreign capital
flows ebb, the government is likely to face increased financing
difficulties and higher borrowing costs.
3. Currency depreciation threatens public
accounts. Further deterioration in the value of the Real and
coupled with higher interest rates would increase pressure on the domestic
debt burden, which reached 53.7% of GDP in August. Since an estimated
27.1% of the current central government debt is dollar denominated, higher
debt servicing costs in local currency terms are likely to force the
government into fiscal adjustment, which will put further downside
pressure on economic activity.
4. Private firms also face financing challenge.
According to the Central Bank, private sector registered debt accounted
for 54.6% of the total in March, the majority of which is foreign currency
denominated. Additionally, the private sector has some US$ 7.3 billion in
foreign debt maturing this year and is faced with an additional US$ 17.4
billion in amortizations next year. Firms are facing not only higher
costs of borrowing in international markets but also lower economic
activity and a deteriorating currency, which is hiking debt payments in
local currency terms.
5. Direct effect of US tourism downturn limited.
The tourism industry is unlikely to precipitate the economic slowdown any
further, since tourism receipts from international travellers account for
only 0.8% of GDP. The tourism industry is likely to experience some
downside pressure, however, since US tourists are the second largest group
to visit Brazil after Argentina, accounting for 12.2% total tourists from
abroad. The continued recession in Argentina, which accounts for 32.8% of
tourists from abroad, and the expected regional slowdown is likely to
exacerbate the tourism industry downturn.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Brazil. For more details please click here.
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