RIO DE JANEIRO, Aug. 27 (UPI) -- Brazil may be famous for its sunny beaches and brilliant soccer players, but its economy has been plagued by overcast skies so far this year.
Unfortunately for investors, the situation Tuesday was no different, despite pledges by international banks to keep credit lines open and a business-friendly presidential candidate gaining in the most recent opinion polls.
While financial markets bounced back early Tuesday, investor hopes were quickly dashed after a central bank decision to reject bids for currency swap contracts, which
essentially act as protection for investors in times of volatility in the currency market.
While the country's main stock index -- the Bovespa -- rose to 10,318, Brazil's benchmark 8 percent bond maturing in 2014 lost 11 cents on the dollar to 59.22, yielding 20.31 percent late in the day. Of more concern is Brazil's currency, which on Tuesday shed 1.41 percent to end at 3.14 against the dollar.
Markets should have been held up more strongly Tuesday, given the success of the meeting in New York between Brazil's central bank president and finance minister and top officials from 16 investment banks Monday. Central bank President Arminio Fraga told reporters the meeting was positive, with the banks pledging to maintain their current level of exposure in the country. But the banks didn't say they would increase credit lines, an essential point given that credit extended to Brazil's businesses by foreign lenders has fallen by up to 50 percent in some cases since late March.
Fraga also emphasized Monday his thoughts that all of Brazil's presidential candidates are committed to maintaining sound economic fundamentals, despite what investors fear about Lula da Silva and Ciro Gomes. He said he is certain that whoever is elected president will stick
to financial guidelines imposed by the International Monetary Fund in conjunction with the recent $30 billion loan package made available by the fund -- such as maintaining a primary budget surplus of 3.75 percent of gross domestic product.
But according to a Morgan Stanley report released Tuesday, the investment bank doesn't think that -- or other policies being pursued now in Brazil -- will be enough.
"We continue to believe that there are severe limitations as to what a 3.75 percent primary surplus can do in an environment with volatile investor confidence," the report said. It said in looking at debt dynamics, "The conclusion we reach .... is that the current stance of policies appears insufficient."
While the Wall Street talks had only a limited impact on the markets, support from the international community for Brazil has nonetheless improved the presidential candidacy of the man seen most market-friendly by investors.
In one of the first polls released since Brazilian candidates began airing their free TV campaign ads, the government's handpicked successor and the market's choice, Jose Serra, sharply cut the distance between his ratings and those of the two front-runners. Serra gained 5 percentage points to reach a 15 percent approval rating.
Serra has been lagging in the polls for weeks, to the dismay of investors who see him as the best chance of Brazil's continuing on a path of economic reform. But Serra now has a great advantage, having been allotted twice as much free TV campaign ad time as his two main left-leaning rivals, whom investors fear may default on Brazil's debts should they come into office.
According to Brazilian election laws, candidates cannot buy TV ad time. Instead, they are given a certain amount of air time based upon the percentage of seats their respective parties hold in the country's lower house of congress. Additionally, Serra has a bigger campaign war chest for other types of advertising, with government records indicating he has nearly twice as much money to spend than any other candidate.
Still out front in the electoral race is Lula da Silva, the Workers' Party candidate who has unnerved investors with his past talk of renegotiating the country's debt. There is also a general feeling he would reverse free-market reforms made under the eight years of President Fernando Henrique Cardoso, who is prohibited by law from seeking a third term. Lula registered a 34 percent rating in the latest poll released Tuesday.
The left-leaning Gomes dropped 7 percentage points to 25 percent. Most of the votes Serra gained were at Gomes' expense.
Most political analysts have consistently said that Serra's poll numbers will rise at the end of the campaign, when the TV ads begin to register with voters. As early as a month ago, nearly half of all Brazilians queried in blind polls couldn't name a single person who was running for the presidency. In this country where newspaper circulations are quite low, yet where nearly every household -- no matter how poor -- has a TV set, Serra's time advantage is priceless.
If no candidate wins an outright majority in the Oct. 6 vote, a second-round runoff between the top two vote winners will take place on Oct. 27. Lula, making his fourth run at the presidency, has always made it to this second round because of his large percentage of hardcore supporters, but has always fallen short.
