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Tuesday, October 28, 2003

Brazilian Debt: Moving Off the Radar Screens?

Morgan Stanleys Gray Newman - the analyst who called the Argentina 'tipping factors' better than anyone I saw - giving the second round of good news today. Obviously the public borrowing needs careful watching and controlling, but it is interesting to watch how these economies seem to be making a transition to a positive feedback dynamic:

It is remarkable how little is written nowadays on Brazil’s debt situation. Just one year ago, investors focused almost exclusively on debt-sustainability models, which were proffered as evidence that default or capital controls were inevitable. We objected to the “inevitability” thesis (see “Brazil: It’s Not Inevitable” in the Global Economic Forum, June 18, 2002), but still spent the bulk of our time working through the vulnerability that Brazil’s domestic and external public debt both represented, as well as the risks arising from the amortization of private external debt. In contrast, today most of the focus by Brazil watchers is on the timing, the breadth, and the sustainability of a recovery in economic activity.

Given how quickly Brazil’s debt situation has moved off the radar screens of many observers and how important it was a little less than a year ago, we thought it would be worthwhile to review the nature of Brazil’s debt today and highlight potential concerns during the coming 12-18 months. Our conclusion is that despite a potentially disturbing headline number expected in late October on the debt-to-GDP ratio, Brazil is making progress on both the public and private debt fronts. Still, we are cautious about extrapolating from the “virtuous circle” we are seeing in 2003 and likely to see in 2004. Ultimately, more thought should be given to even more rapid debt reduction, perhaps even by unconventional means.................

Brazil’s debt profile is likely to benefit from “overshooting” in 2004 as the virtuous circle of lower interest rates, better prospects for economic growth, and a strong currency replace the vicious circle of higher interest rates, worsened prospects for economic growth, and a weaker currency seen in 2002. Brazil watchers, however, should be careful about extrapolating too much from either 2002 or 2004. Ultimately, only a commitment to prudent fiscal and monetary policy, with further advances on the reform front, can reduce the risks that Brazil’s debt profile poses to its economy.
Source: MS Global Economic Forum

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