SUNS 4340 Tuesday 8 December 1998
BRAZIL: DEFEAT OF AUSTERITY MEASURE DEPRESSES MARKET
Rio de Janeiro, Dec 4 (IPS/Mario Osava) -- The Brazilian government's failure to push a key austerity measure through Congress unleashed a new wave of pessimism in the financial market here and in Brazil's area of influence in South America.
Brazil's stock markets slid nine percent Thursday evening, dragging down the Buenos Aires stock exchange in neighbouring Argentina. Brazil's Sao Paulo stock exchange closed 8.7% down Thursday. The selloff put trading at the highest level seen in two months.
The week had already gotten off to a bad start, with a 5.08 percent dip Monday on the Sao Paulo stock exchange and mild losses over the next few days. The bearish climate was attributed to the realisation of profits accumulated in November, and ripple effects from the global market.
But Thursday's tumble was a consequence of the Chamber of Deputies' 205-187 vote against a government measure designed to increase social security contributions by public employees from 11 to 20 percent of the highest salaries, and to dock 11 percent of public sector pensions.
The government had already tried three times to push the initiative through Congress. But this time around, the bill was expected to drum up the necessary support, given the pressing financial crisis and the need for a sharp reduction in the budget deficit.
The bill was to have brought state coffers an additional 4.9 billion reals (4.08 billion dollars) a year. For next year, the defeat spells a loss of 2.15 billion dollars, as the measure would have gone into
effect three months after ratification, Minister of Social Security Waldeck Ornellas explained.
The Brazilian government has pledged the International Monetary Fund (IMF) a fiscal adjustment of 28 billion reals (23.3 billion dollars) for 1999.
Planning Minister Paulo Paiva said the bill's defeat would make it necessary to implement even more drastic cutbacks in public expenditure, and new tax raises - or to submit the measure to Congress once again.
Indeed, President Fernando Henrique Cardoso announced through his spokesman Sergio Amaral that he planned to make a fresh attempt in January, and that he was confident that the lower house of parliament would have reached a clearer understanding of the need for the measure.
Initiatives of this kind cannot be submitted twice in the same year.
The president added that the target of a 23.3-billion-dollar adjustment would remain in place at any cost.
According to analysts, the bill's latest defeat was a new indication that the majority enjoyed by the ruling party and its allies in Congress did not hold true when it came to unpopular measures, while
the stock market decline reflected the market's lack of confidence in the government's capacity to meet the targets laid out by its Fiscal Stability Plan.
The social security system is the second biggest cause of the budget deficit, which already exceeds 7.5 percent of Gross Domestic Product (GDP). Interest payments on the public debt - which is expected to be reduced through an improvement in the primary public accounts - are the main cause.
Public employees generally retire early, and public sector pensions stand at the same level as salaries - which means the retirees account for 83% of the social security system deficit, estimated at 35 billion dollars a year.
The bearish climate on the market was also aggravated by other government decisions and measures. The National Bank of Economic and Social Development, Brazil's chief provider of development loans, raised its long-term interest rate from 11.68 to 18.06 percent, which led to a depression in the productive sector.
And good news from abroad, such as IMF approval of a $41.5 billion aid package and a slashing of interest rates by the European Union, failed to neutralise the negative impact of the Chamber of Deputies' decision.
Not only has the local stock market been reporting losses, but Brazilian foreign debt securities have been devalued, futures market interest rates have risen, the flight of capital from Brazil has intensified - and Latin America's outlook has become grimmer on the whole.