- The Washington Times - Tuesday, December 30, 2003

It is too soon to pop open the champagne in Brazil and Argentina, but these countries are starting to show signs of economic recovery.

For Argentina, the government predicts that growth this year will be more than 7 percent, the stock market index has reached record highs (in peso terms) and a healthy trade surplus will be posted. Progress has been fueled in large part by a deeply devalued peso — a phenomenon that will get the country only so much mileage. Also, Argentina is in the initial process of renegotiating more than $80 billion in defaulted foreign-currency debt. The terms of Argentina’s payment of this debt will be critical to an ongoing recovery.

The business community, meanwhile, can hardly contain its enthusiasm over Brazilian President Luiz Inacio “Lula” da Silva. Mr. Lula, as he is affectionately known, recently achieved the most important legislative win of his presidency by limiting the government’s pension costs, a move that will save the public sector billions of dollars. Mr. Lula, a self-styled socialist, has become keenly aware of the need to cut Brazil’s borrowing cost by demonstrating fiscal responsibility. After almost a year in power, he has reduced government spending by a record $4.8 billion.

Since Jan. 1, Brazil’s benchmark stock index has climbed 134 percent and its currency has gained 22 percent against the dollar. The country’s borrowing cost is declining. Brazil’s benchmark bond due in 2014 has about doubled in price to 98 cents on the dollar since the fourth quarter of last year. Last week, the central bank lowered the overnight lending rate for a seventh straight month to 16.5 percent.

But the growth outlook is poor. This year, growth is expected to be as low as 0.4 percent. In the third quarter of this year, the economy shrank by 1.5 percent compared to the same period a year ago. And Brazil still has $400 billion in debt.

Brazil and Argentina could reach solid economic footing next year, if their leaders remain keenly attuned to how much fiscal austerity their weary publics are willing to take and the market demands. Brazil and Argentina can ill afford another meltdown, so there is much riding on the continuation of the current progress.

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