Brazil Economy Soars, but Nation Still Must Tackle Its Foreign Debt

With the Brazilian economy booming and no more local elections scheduled this year, President Jose Sarney seems ready to tackle renegotiation of Brazil’s $100-billion foreign debt.

As the Third World’s largest debtor and as a major trading nation, Brazil’s foreign debt policy is more important for international banks than the threats of a moratorium by more radical but less substantial debtors, such as Peru.

“When the circus comes to town, it is the elephant that leads the parade,” said a Brazilian diplomat, referring to Brazil’s dominant role in the debtor group.

Finance Minister Dilson Funaro is scheduled to meet with Treasury Secretary James A. Baker III in Washington today to discuss Brazil’s refinancing issue and Baker’s proposal for an overall solution to the international debt problem.

No Clear Negotiating Stance

That plan--a combination of increased lending by commercial banks, by the World Bank and other multinational lending organizations tied to market-oriented reforms in the economic policies of the borrowers--stands little chance of acceptance by other debtor nations if Brazil does not agree to it.

So far, however, Sarney and his advisers have not defined a clear negotiating position. A succession of international bankers has passed through Brasilia last week without obtaining much more than assurances that Brazil will achieve 6% growth and a lower inflation rate next year.

Sarney has declared repeatedly that he will not adopt “recessionary measures” to combat inflation and has set a goal of continued high rates of growth as a condition for obtaining long-term refinancing of the foreign debt, nearly half of which comes due by 1991.

By the latest estimates of the Ministry of Planning and of private analysts, Brazil’s economy will grow between 7% and 8% this year.

But in a national poll commissioned by the government before the Nov. 15 elections for mayors in all state capitals, a majority of those responding said inflation was their major concern, not employment or economic growth.

Sarney’s Brazilian Democratic Movement party, which has a majority in Congress, lost the mayoralty races in Sao Paulo, Rio de Janeiro, Porto Alegre, Recife and Fortaleza, five of Brazil’s key cities. Leftist opposition parties clearly gained ground.

Price Controls

In July, Sarney dropped his first finance minister, Francisco Dornelles, who was pushing without success for budget-cutting austerity measures that are part of the International Monetary Fund’s orthodox prescription for reducing inflation. Dornelles’ replacement was Funaro, a Sao Paulo industrialist, who has been trying to fight inflation by price controls.

In August, before Funaro’s efforts could have any effect, inflation reached 14%, the highest monthly rate in five years.

The causes of inflation are clearly in the deficits of the federal government and state enterprises, which borrow heavily to meet payments. Funaro has promised an attack on the deficits. Last Tuesday’s decision by Funaro and the central bank to liquidate three financially troubled banks, including two big Sao Paulo institutions, was seen in financial quarters as a sign that the government has begun to move on long-postponed decisions.

The awaited decisions include a proposal to the IMF and foreign creditor banks for refinancing of the debt, along with an anti-inflationary package of tax and budget-cutting measures.

Funaro has prepared tax increases to be submitted to Congress this week that would add $6 billion in revenue next year. This would still leave a deficit of $16 billion, about 7% of the gross national product.

The bank liquidations indicate a stiffening of the government’s resolve to deal with financial problems. It had been known for more than a year that the Banco do Commercio e Industria (COMIND), Brazil’s ninth-largest in assets, and Banco Auxiliar, owned by the Bonfiglioli industrial group of Sao Paulo and the 17th-largest, were in serious trouble. The smaller Maisonnave bank of Porto Alegre was also closed.

Cut Off Credit Lines

Bank of America cut off $100 million in credit lines to COMIND in March. However, banking sources here said that the three banks in forced liquidation still owe about $450 million to U.S. banks, mainly in New York.

The central bank has guaranteed full value on deposits for about 360,000 depositors. But Fernao Bracher, president of the central bank, said the Brazilian government would not assume responsibility for the external liabilities of the banks. As a result, the U.S. banks will be treated like other creditors, standing in line to await payment if the assets of the banks can cover the debts.

The problems of the three banks reportedly grew out of disorderly expansion and questionable loans made to borrowers closely linked to the bank’s directors.

In general, Brazil’s banks are making money, profiting from financing a boom in consumer spending and a bountiful agricultural harvest. The shares of the biggest banks, Bradesco, Itau and Unibanco, have soared on the stock exchanges due to high profits this year.

The strong growth performance, led by a 12% increase in industrial output, has been achieved despite inflation running at an annual rate of 220%. The general price index is expected to rise 11% this month.

High Interest Rates

The inflation has been accompanied by high interest rates. The government is paying 18% on short-term treasury notes and, because the effect of inflation is so great, is also making an upward adjustment of the principal amount of the notes. The internal debt has soared as the government has borrowed at high cost to cover the huge deficits.

Still, there is no sense of urgency in official circles over reaching a refinancing deal on foreign debt. Brazil will reach its target of a $12-billion foreign trade surplus this year, and reserves stand at more than $8.5 billion.

The government’s major concern is continued economic development, and Sarney’s advisers see the prospect of continuing to pay $11 billion a year in interest on the foreign debt as an obstacle to high growth.

To reduce this debt service burden, Minister of Planning Joao Sayad has argued, Brazil must negotiate a reduction in interest payments with foreign creditors. But other officials argue that Brazil needs new loans, either from private banks or from international lending agencies, such as the World Bank.

In either case, negotiations will be necessary with the international financial community. Brazil expects to open talks with the IMF next month, according to Fernao Bracher, president of the central bank.