GLOBAL MARKETS IN TURMOIL : Brazil: Similarities Have Investors Worried

Day after day, the electronic panels at the Brazilian stock exchanges have flashed the bad news. Traders clutch their cellular phones as if they were rosary beads and watch as the worth of the country’s leading companies slide another few points before their eyes.

At this city’s stock exchange, and the far bigger bourse of Sao Paulo, what’s been called the “tequila hangover” is lingering. Though markets regained ground dramatically this week--stock prices surged nearly 7% on Friday in Sao Paulo--the cheers were muted.

Since Dec. 20, when Mexico’s financial markets collapsed, dragging down stocks from Bogota to Buenos Aires, breaking even has been the broker’s prayer.

In the three weeks after Mexico’s crisis began, Brazilian stocks lost about a third of their value. Investors withdrew $1.2 billion from the capital markets, almost 10% of all the investments on the stock market. The roller-coaster ride is expected to continue.

Is Brazil tomorrow’s Mexico?

There are disconcerting similarities. Like the peso at Mexico’s 11th hour, the Brazilian real is overvalued. In a country known for its aggressive exports, foreign goods are now flooding in. Some of its largest banks are in trouble. A new, untried government has taken over.

For Brazil, Mexico’s crisis seems a clear warning about how quickly a country can fall from investors’ grace. Yet since late December, Brazilians have been furiously arguing that point.

“Simplistic, naive and precipitous,” snapped Pedro Malan, the normally soft-spoken finance minister, at those who would stuff all of Latin America into the same pinata.

Clearly, Brazil enjoys some advantages over Mexico. It has accumulated $43 billion in hard currency reserves, enough to buy 16 months of imports, a comfortable cushion for any country. Even with an overvalued currency, Brazil sported a trade surplus of $11.5 billion for 1994.

Thanks to the Real Plan, the new economic stabilization program launched in July, monthly inflation has nose-dived--from nearly 50% in June to 1.25% in December. That is still alarmingly high by the standards of the richer world but a blessing for Brazil, which has lived with double-digit monthly inflation for half a decade.

The military has left power to civilians, and last October’s general elections were the country’s freest and fairest in memory. Unlike in Mexico, no outback rebellions or political murders have rocked the nation in decades. President Fernando Henrique Cardoso, who took office Jan. 1, has a respected Cabinet, a solid base in Congress and a halo effect that should spirit him through the first months of government.

“After Mexico, the risk of investing in Latin America has obviously become greater,” said analyst Roberto Serwaczak of Baring Securities in Sao Paulo. But “Brazil will have the biggest piece of a smaller pie,” he said.

Some in private business agree.

“The Mexico effect is more anxiety than reality,” said Jose Baia Sobrinho, president of Banco Pontual, a small Sao Paulo-based bank.

Though the central bank recently intervened to straighten out the mess in Brazil’s troubled state-owned banks, the private banks--which account for two-thirds of the nation’s banking activity--are solid, and most have absorbed their stock market losses.

Nor is Brazil so handcuffed to speculative capital as was Mexico. About $15 billion invested in Brazil is “volatile money,” Serwaczak calculated, leaving at least $20 billion in “solid” hard currency reserves. “This leaves Brazil in a very comfortable position.”

But one gnawing similarity to Mexico is Brazil’s super-valued currency, the real . When it was minted last July, the real was expected to be paired one-to-one to the dollar. In fact, it rose sharply and now fetches about $1.20.

The immediate result was a tide of imports, from shampoo to Mercedes-Benzes. Not all the foreign goods are consumer-oriented, however. Brazil bought $15.7 billion of foreign-made machine tools last year, compared to $13.8 billion in 1993. These are investments meant to revitalize Brazilian industry, which is already growing again, by more than 6%.

But there is a price to pay for an over-endowed currency. Exporters are losing their competitive edge abroad. The country ran a trade deficit in November and December, Brazil’s first in more than a decade. The current account deficit--the difference between export revenues and new investment, against payment for imports and interest on debt--is now just over $1 billion, but it is expected to rise to $12 billion this year.

Fiddling with the exchange rate could make things even worse. An abrupt devaluation could spook investors, as in Mexico, and revive inflation, which is down but not dead.

Far better than a devaluation, exporters say, would be to boost trade by reducing taxes and port costs. There is much to take aim at. Loading a container at Santos, Brazil’s main port, costs about $400, twice that of New York and three times greater than in Antwerp, Belgium. Taxes add about 20% to the price of exports.

“It’s fashionable to say that Brazil is doing things right and Mexico has done them all wrong. The fact is, Mexico has been pursuing important reforms for years and Brazil is just beginning,” said Claudio Haddad, a senior officer at Banco Garantia, a large Sao Paulo commercial bank.

Yet perhaps Mexico offers a more immediate lesson for Brazil: the perils of relying on foreign bounty, whether it is hot money or cool-headed investment.

“When there is a crisis in confidence, it doesn’t matter whether you have more speculative money or direct foreign investment,” said Eduardo Giannetti, an economist at the University of Sao Paulo. “Once trouble hits, it can go very quickly.”

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JITTERS IN BRAZIL

Mexico’s economic crisis has Brazilians looking nervously over their shoulders. Brazil’s stock markets lost a third of their value after Mexico devalued its peso but recouped most of the losses this week. Although Brazil shares some of Mexico’s problems, economists say it is less vulnerable.

INFLATION

Jan. 1995: 1.5% (Projection)

Brazil’s inflation rate fell sharply in July, 1994, when the country introduced the new currency, the real.

BOVESPA STOCK INDEX

Weekly closes on the Sao Paulo stock exchange:

Friday: 41,038, up 2,632

Sources: Bloomberg Business News, TradeLine