Brazil’s Austerity Measures Could Cut Earnings Globally

Brazil’s decision to slash spending and raise taxes could cut the pace of growth next year in half, taking a toll on profits at companies ranging from foreign auto makers such as Ford Motor Co. to local brewers.

Ford and Swiss tile maker Keramik Holding said the slowdown could hurt its earnings, while Cia. Cerjevaria Brahma, Brazil’s leading brewer, withdrew a $300-million investment plan after the measures were unveiled Monday.

“The cuts clearly signal slower economic growth,” said Odair Abate, chief economist in the Sao Paulo office of British-based Lloyds Bank. “The government says they now expect 2% growth in 1998; I think that’s optimistic.”

Brazil’s economic growth could slump to between 0% and 2% next year, Abate said. Before the $18 billion in spending cuts and tax increases were announced, he had expected the economy to grow between 4% and 4.5%.

The government moved to trim spending after the central bank almost doubled interest rates, to about 43% a year, two weeks ago. That bid to shore up the currency added about $2 billion a month to government interest payments.

The expected toll on earnings was reflected Tuesday by the benchmark Bovespa stock index in Sao Paulo, which tumbled 295 points, or 3.3%, to 8,711, its lowest level since February. Companies were quick to react.

Ford Chairman Alex Trotman expressed concern about whether the U.S. auto maker could boost earnings in its operations in South America.

“Things have been going very well for us this year, and of course we’re disturbed by anything that slows down the pace of development of the auto industry,” Trotman said. Ford earned $115 million in South America in the first nine months of 1997, contrasted with a loss of $355 million in the year-earlier period.

Brazilian retail sales could be heavily hit, with sales at malls falling by as must as 7% in December, said Nabil Shayoun, president of the Brazilian Assn. of Shopping Center Retailers. If rates fall soon, the shrinking of the economy may not be that severe, he said.