Devaluation of Real Is Having Tangible Effect on Brazilians

It didn’t take long for Brazil’s currency devaluation to make itself felt in the Versalles Citroen auto showroom here, where sticker prices of imported French cars have already been jacked up 8%.

A strong real had made Brazil one of the world’s fastest-growing auto markets in the 1990s. But the newly opened Citroen showroom was noticeably devoid of tire-kickers Sunday. One of the few, insurance executive Sergio Lisboa, said he could feel the ground moving beneath his feet.

“I don’t know how you can avoid being confused,” Lisboa said, easing himself out of the driver’s seat of a $45,000 Citroen Exclusive sedan he’d been coveting. Attentive dealership manager Cid Georges acknowledged that last week’s “turbulence” had scared most of his customers away.

The Brazilian real’s fall also had an immediate effect on P.B. Tours, a travel agency in the Ipanema district, where 80% of all international reservations were canceled Friday after Brazil finally let its currency float, resulting in a one-day loss of 9% in value against the dollar on top of an 8% shrinkage Wednesday.

Short-Term Effects Likely to Be Dire

Buoyed by the strength of their currency, Brazilians have been enthusiastic world travelers this decade, spending $4 billion more abroad than foreigners spent here last year. But that was before dollar-based bookings on foreign airplanes and in offshore hotels became 17% more costly last week.

“It’s horrible. The last thing Brazilians want to spend money on now is leisure,” said P.B. Tours manager Elizabeth Saboia.

In ways big and small this weekend, Brazilian consumers and businesses came around to the realization that they all will feel the effects of last week’s devaluation as the consequences slowly work through the economy.

The devaluation may someday prime an economic comeback by making Brazilian exports more attractive and by stimulating the domestic tourism industry, thus generating more domestic jobs.

Many of the imported goods whose prices are now out of reach will be replaced by cheaper domestic goods made by a Brazilian industry that has undergone four years of modernization and cost-cutting, said Amaury de Souza, a Rio de Janeiro political scientist and consultant.

But the short-term effects are likely to be dire. A deep Brazilian recession is expected in 1999, partly because consumers--one of the economy’s prime engines--will quit buying rather than pay inflated prices. Inflation is expected to rise, as will joblessness.

Economists are forecasting a severe economic contraction of as much as 5% this year. The recession could last the whole year, Banco Patrimonio’s chief economist, Luis Fernando Lopes, said this weekend.

“Every economy that undergoes this kind of devaluation is dragged into a recession in the first four or five quarters,” he said. Inflation will reach a minimum 6% in 1999, up from less than 2% in 1998, he said.

Lopes and other pundits are already looking past this year, saying how quickly Brazil emerges from its crisis will depend on how its government manages the crisis, specifically whether it takes action to trim its enormous budget deficit.

Sound policy could take Brazil into a short-lived, South Korea-like recession from which it will emerge stronger, or it could plunge into a bottomless, Indonesia-like crisis characterized by mounting social and political tensions, Lopes said.

Missteps could also create a “samba effect” of reverberating economic turmoil among its neighbors, similar to the “tequila effect” from Mexico’s devaluation and 1995 recession.

For consumers of some imported goods, the effects will take time to be felt.

At Rio Sul, a glitzy shopping mall in the Botafogo district, even retailers such as Barley’s--which specializes in imports of consumer electronics, appliances and toys--went ahead with annual January sales on inventories they’d already stocked.

“We’re marking down everything at least 10%. We have confidence in the economic policies,” said manager Adriano Santos, standing amid imported Toshiba videodisc players, Black & Decker tools and Mattel Barbie dolls.

But soon, consumers will pay more for the foreign perfumes, toys, appliances and athletic shoes that until now were relatively cheap, United Nations economist Carlos Guanziroli warned.

Conceded Santos, “All bets are off after the sale.”

Manufactured items with foreign components will also face cost pressure, including items as prosaic as plastic bags. Lazlo Sved’s polyethylene plastics business is already paying 10% more for imported pigments for the plastic bags he manufactures here, a cost he’ll pass along to consumers.

“We are not worried. We are accustomed to economic problems in Brazil,” Sved said, referring to the decades-long cycles of hyper-inflation and devaluations that Brazil endured before reforms implemented in 1994 by President Fernando Henrique Cardoso.

And though world oil prices remain low, oil is suddenly more expensive for Brazilians because it is traded in dollars on world markets. Although Brazil has reduced its dependence on foreign hydrocarbons, it still imports 35% of its petroleum. The higher cost will hit not only motorists such as Lisboa but electricity customers who can expect to see energy bills rise at least 10% this year, experts say.

Over the longer term, Brazilians will also shoulder the added cost of imported machinery and components that manufacturers here depend on to produce a wide array of goods from autos to toothpaste. Consumers will pay those higher costs, if they choose to buy, or the increases will be absorbed by retailers and manufacturers, who will respond by slowing production and laying off workers.

Brazil’s huge auto industry is especially vulnerable. Even before the devaluations last week, Brazilian car sales dropped in 1998 to 1.19 million units, down 28% from 1.64 million in 1997. Sales were hit by rising interest rates and unemployment fallout from Cardoso’s failed attempt to support the real.

The devaluation worsens all those pressures, and car sales are likely to fall even further in 1999, Banco Patrimonio’s Lopes said. That’s bad economic news because the auto industry has a ripple effect throughout the economy when sales are strong.

Brazilians on weekend shopping trips figured that perhaps their leaders will do the right thing.

“Our Congress will only look at reality in the face of a crisis,” said James Tompkins, a Rio de Janeiro publisher who was out car shopping with his family Sunday.

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ASSESSING THE DAMAGE

Economists say Brazil’s crisis might be less damaging than Asia’s. A1