October 3, 1998

Kaleidoscope Of Doubts Clog Poll

Eric Ellis,  Rio De Janeiro

With a gallows humour that could only come from the world's most uneven distribution of income, Brazilians describe themselves with two great cliches.

"We are the Country of the Future", they chorus, "and we always will be", and, Brazil isn't just one country, it's three - Brazil, Belgium and India."

Like most cliches, there's a strong basis of fact underlying the oft-repeated phrases.

There is the Belgium of the streets of Sao Paulo's Morumbi district - rows of enormous mansions of grand 1950s coffee barons, inherited by today's financial and media tycoons with wealth that would embarrass Croesus. In those leafy sanctuaries, where domestic staff can run to 50, live the 2 per cent of Brazilians who earn more than $A20,000 a year.

And there is the India of Rio's Rocinha, a hillside shanty of just a few hectares and 200,000 people, where the best views in the world can't obscure the fact that 75 per cent of Brazilians take home less than $A3,000 each year.

The way the hobbled Brazilian economy seems to be heading right now, comparing it with India may well be flattering.

Yesterday's near 10 per cent slump in the Brazilian sharemarket is just the latest bout of bad news to hit an economy that only a few months ago was the centrefold of the emerging markets. A confident democracy staffed by able technocrats, Brazil then boasted around $US75 billion in the national bank account, as well as rising incomes and negligible inflation. And it had the vote of approval of the World Bank, the IMF and Bill Clinton that it was not Thailand or Indonesia or South Korea.

Indeed, as Asia has imploded these past 15 months, Latinos led by Brazil -then the developing world's biggest recipient of foreign investment -fended off challenges with aplomb. The US was pleased that its own backyard was in such good shape, particularly as its banks have three times the exposure to Brazil as they did to Russia.

Today, Washington is no longer so cocky. Brazil's sharemarket has halved in the past two months, the $US75 billion has suddenly become $US45 billion, handing speculators attacking the vulnerable real an easy $US30 billion.

Scared money is leaving the country at a rate of nearly $US1 billion a day, forcing interest rates to double and, having seen the $US20 billion pledged to the Telebras telcom float in August suddenly halved, foreign investers have stopped sending money into the country. And that old Brazilian bogey, inflation, is creeping into double figures. Admittedly the inflation seen so far is not the 3000 per cent of the lost decade of the 1980s, but alarming enough when it has been 2-3 per cent for two years. And Ronaldo lost them the World Cup.

This weekend, as Brazilians vote in a presidential election that could dictate whether or not the world slips into recession, alarmed officials in Washington are nutting out a $US30 billion IMF-led bail-out to make sure Brazil doesn't become the next Russia and take the world with it.

Brazilians are in no doubt who will win the election.

Since 1995, President Fernando Enrique Cardoso has reformed Brazil into a thriving democracy which, although it could not be compared with the democracies of most Western nations, is probably more transparent than any of the newly minted Asian democracies such as South Korea, Taiwan or Thailand.

The last polls before Sunday's vote show Cardoso, 67, a former sociologist, has about 47 per cent of the vote, compared with the 24 per cent of his nearest rival, labour leader Luis Inacio Lula da Silva, 52, whose platform at times seems loopily Hansonesque. The problem for Cardoso is that he probably does not have enough votes to win outright on the first ballot. If Cardoso polls less than 50 per cent, it will force him into a run-off against Lula, which he is likely to win but will affect his mandate.

Another, connected problem is that the market fears that a politically weakened Cardoso will be reluctant to make the hard decisions demanded by Washington and the IMF in continuing Brazil's reform process. The worst case scenario is that Brazil will become the latest Russia and take its American neighbours, North and South, with it.

Those fears account for speeding the official pace in Treasury Secretary Robert Rubin's office since Asia started to falter last year.

Brazil accounts for 45 per cent of Latin America's GDP and regional economists fear the "samba effect" of a collapse of the real would tip the otherwise buoyant continent into recession, and so soon after coming out after the 1995 Mexican tequila crisis.

Brazil's election and proposed bailout comes as anxious Latin American finance ministers gather in Washington for this week's IMF annual meeting. No need to ask who will be the guest of honour this year.