- The Washington Times - Sunday, November 24, 2002

In the wake of his presidential triumph in the October elections, Brazil's Luiz Inacio "Lula" da Silva has managed to invert his previously hapless relationship with the market. Before his election victory, Mr. da Silva's popularity was synonymous with market bearishness. But stocks, bonds and Brazil's currency (the real) are moving up from their pre-election lows. Although it is too early to herald a recovery, markets could be in the beginning stages of a sustained rally, if economic news continues to be promising.
The Brazilian government this week refinanced about $2 billion in dollar-denominated debt that matured Wednesday. The news relieved market jitters, which were weighing on the real. Still, the economy remains on edge. Market players hope to see Mr. da Silva reform Brazil's labor laws, social security policies and tax laws and maintain fiscal and monetary discipline.
Whether Mr. da Silva will give investors what they are looking for remains to be seen. After the election, senior officials from Mr. da Silva's party began to discuss reforming Brazil's social security program. This change, along with other reforms, would require changes in the country's constitution. Brazil's current Cardoso administration, which has been generally cheered by the market, never seriously embarked on any of these reforms. And, though Mr. da Silva is a former union leader and more outwardly populist than the outgoing administration, his party struck a key alliance earlier this month with the centrist Democratic Movement Party, which gives it a congressional majority and the support of several governors. This alliance would be necessary for the kind of structural reforms investors are looking for. Also, Mr. da Silva's modified budget for next year and minimum-wage proposals are more conservative than the policies of the outgoing administration.
Still, Mr. da Silva is inheriting a hefty debt load that would be unsustainable without assistance from the International Monetary Fund (IMF) and an eventual fall in interest rates. Under current agreements, Brazil is slated to receive $24 billion in IMF loans next year and $3 billion next month. Roughly 85 percent of Brazil's public debt is linked to the dollar or to local interest rates, which are still in the double digits. In September, the public sector's net debt was at a record $252 billion. The IMF said last week that it didn't plan to raise the bar on its loan requirements, keeping steady its primary budget surplus target at 3.75 percent of the gross domestic product.
Although the outlook for Brazil remains mixed, Mr. da Silva has been demonstrating a sober awareness of fiscal and economic realities. Market players, meanwhile, have recovered from their Lula phobias which may have been overdone.

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