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 IMF Criticizes Brazil's Exposure to Instability in Currency Markets

By: Joseph Rebello

The Wall Street Journal, February 8, 2002

Washington -- The International Monetary Fund warned Brazil Thursday that it remains vulnerable to the economic turmoil that has buffeted other South American countries, saying it has too much debt that could be affected by exchange-rate fluctuations.

The agency, reviewing the performance of South America's largest economy over the last year, praised the actions of Brazilian policymakers to shore up the economy in the face of the global economic slowdown and a crisis in neighboring Argentina. Brazil, the IMF said, "responded swiftly in the face of a significant deterioration in the external environment."

But Brazil, which relies on foreign investment to finance its $23.2 billion current-account deficit, may not be entirely out of danger. "Given large external financing requirements, Brazil remains nevertheless exposed to a volatile international environment," the IMF said.

It said Brazil's vulnerability lies chiefly in its foreign debt, equal to 18.8% of the gross domestic product. "The large share of the public debt that is linked to the exchange rate makes the overall fiscal balance and the debt-to-GDP ratio highly sensitive to exchange-rate movements," the IMF said. It urged Brazil's government to "reduce the share of exchange-rate-indexed debt as market conditions allow."

Brazil's economic growth slowed in 2001, but the economy hasn't been infected so far by Argentina's traumatic slide into recession. Most economists have taken that as a sign that South American economies aren't as vulnerable to financial contagion as they were in the late 1990s. The IMF, however, said that Brazil shouldn't remain vigilant.

IMF directors "highlighted in particular the need for continued close monitoring of regional developments that could affect the Brazilian economy," the agency said. "It is therefore important that the authorities maintain the proactive policy approach that has served the country well in recent years." Brazil, they said, should maintain "strong fiscal discipline" and its floating-exchange rate system while speeding up reforms in the structure of the economy.

The IMF said Brazil's banking system -- often a source of economic instability in emerging-market economies -- remains "fundamentally sound." Brazilian banks, it said, have "low levels of nonperforming loans and solid provisioning" against loan losses.

The IMF praised Brazil's trade policy, which is becoming freer. But it criticized the policies of the country's biggest trading partners, mainly big industrial countries. IMF directors complained that "most industrial-country markets continue to maintain tariff peaks and nontariff barriers to imports of many products for which Brazil has comparative advantage." They urged those countries to "pursue trade liberalization in favor of Brazil and other developing countries."


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