Brazilian Crisis – 1998/1999. Brazil vs. Asia Current Account of ~4%GDP vs. 8% for Thailand Fixed Peg vs. Crawling Peg (Slow Currency Depreciation 8%

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Presentation transcript:

Brazilian Crisis – 1998/1999

Brazil vs. Asia Current Account of ~4%GDP vs. 8% for Thailand Fixed Peg vs. Crawling Peg (Slow Currency Depreciation 8% p.a.) Privatization and FDI were expected to cover more than 30% of CA deficit Strong Foreign Investment Pattern (95-US$5B; 96- US$13B; 97-US$16B) Political Stability Controlled Credit Expansion (Below 30% of GDP)

What went wrong? Two Main Factors Adverse Price Shock between Jan-97 and Jan-99 Exported Products Prices fell 16% International Credit Restrictions Russian Crisis – August/98 The Brazilian Strategy assumed that the Country would have time to do the necessary adjustments, while the rest of the world financed the current account deficit.

Crisis Cronology Deterioration of Primary Results (Interest not Included) Increase in Public Debt Source Federal States and Municipalities State Enterprises Total

Budget Deficit Budget Deficit (R$ MM) 47,027 45,741 53,232 72,490 96,158 GDP (R$ B) 974 1,000 1,033 1,035 1,043 Deficit (%GDP)4.83%4.57%5.15%7.00%9.22%

Debt Evolution (% of GDP) Source Federal States and Municipalities State Enterprises Total

Crisis Cronology Increase in CA Deficit as a % of GDP Increase in financial needs

Current Account Deficit

Trade Balance Trade Balance 10,843 (3,353) (5,556) (8,365) (6,591) (1,198) 2. Services (14,743) (18,600) (21,044) (27,289) (28,799) (25,211) 3. Unilateral Transfers 2,588 3,974 2,899 2,216 1,778 2,035 Current Account (1,312) (17,979) (23,701) (33,438) (33,612) (24,374)

Financial System

Crisis Cronology Political Issues Itamar Franco (former President and current Governor of Minas Gerais) announced a default on the State Debt. International Agents fly out of the country

Unemployment Rate

Interest Rate

International Reserves

Foreign Exchange Rate

Stock Exchange Bovespa

GDP Growth

GDP US$

Inflation Rate

Monetary Base

Gross Capital Formation

National Accounts

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