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Nov. 11, 2002 at 12:21 PM
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WASHINGTON, Nov. 11 (UPI) -- An International Monetary Fund team is in Brazil this week conducting the first review of finances since a $30-billion loan package was extended to the country in August.

At stake is a $3 billion loan disbursement on which Brazil can draw down this year, the remaining $24 billion it can take in 2003, and the preservation of its best hope at leaving behind the economic ruin this year has wrought -- namely, international credit.

Analysts are predicting that the IMF team will approve the continuation of the loan after a week of combing through Brazil's compliance on issues such as level of debt, spending and maintenance of foreign reserves.

But what Brazil watchers are looking for is how the fund reacts after its as-yet unscheduled meeting with officials from President-elect Luiz Inacio Lula da Silva's Workers' Party and whether the next president's team seems ready to abide by the IMF demands on the loan.

Lula -- as the president-elect is commonly known -- has repeatedly said he will maintain fiscal discipline and meet all IMF targets -- such as maintaining a primary-budget surplus -- excluding debt payments -- of 3.75 percent of gross domestic product.

But Lula has also repeatedly sworn to do away with hunger, push through an increase in the minimum wage and funnel more money to social programs -- all spending hikes that don't agree with the IMF's ideas of fiscal austerity. Lula takes over the presidency on Jan. 1.

Additionally, it appears the fiscal target on primary surplus, which the fund reserves the right to revise upward, could prove a sticking point in the coming months.

While Lula's team is sure to meet with fund officials, it seems unlikely that any details of his economic plans will be put on the table.

"The president-elect doesn't intend to present any proposals to the IMF but will only have a dialogue, because the negotiations are the prerogative of the current government," Antonio Palocci, the head of Lula's transition team, said over the weekend.

The fund, clearly, is hoping to squeeze more out of Lula.

"Obviously there's great interest in hearing the plans and the thoughts of the new administration, the prospective new administration, and that's what we will be doing," IMF spokesman Thomas Dawson said in Washington last week.

The continuance of the IMF loan is a must for Brazil, which has seen its markets and currency crash in the past year on anxieties about the election of Lula. The soon to be president, is a former union leader who took on Brazil's military regime in the late 1970s.

Lula has cooled his radical talk in the past year, but investors are still leery and hesitant to jump back into the country until the new leader proves himself.

The biggest noose around Lula's neck is Brazil's $230-billion debt, a large chunk of which comes due next year. As much of that debt is linked to the dollar or floating interest rates, market volatility significantly adds to the burden.

In the past year, Brazil's currency -- the real -- has shed about 35 percent, though it and the Bovespa stock index have been shoring up of late. Brazil's benchmark 8-percent bond has also been stabilizing since Lula was elected on Oct. 27 and subsequently repeated his words on fiscal austerity.

The potential hurdle in the IMF review of Brazil's primary budget surplus has unified Brazilian officials in the thought that it need not be revised.

The government of President Fernando Henrique Cardoso said a surplus of 3.88 percent of GDP will be met this year, but that number will be 3.75 percent in 2003.

Cardoso and officials from the Workers' Party have said in the past week they will fight any attempts by the IMF to have that percentage increased, though Lula himself said during the campaign that he might take that action, if it is necessary to help avoid a default on the nation's debt.

"I don't see any reason to imagine that the surplus needs to be more at this time," Cardoso told the newspaper Estado de Sao Paulo in Monday edition. "I don't think it is the occasion for that nor is a revision necessary, and President(-elect) Lula has the same feelings as I do on this matter."

The most evident red flag for the fund, and that which could prompt it to seek a higher surplus, is the growth of Brazil's debt as a percentage of GDP. This increased from 58.9 percent last December to 63.9 percent in September, the most recent month the statistic is available.

According to Brazilian officials, the percentage of debt to GDP falls by half a percentage point with each percentage point the real gains against the dollar.

In the past week, the real has strengthened 5 percent, but this is still unlikely to sway the fund, which wants to see debt come down to 58.5 percent of GDP by the end of 2003.

Brazil does have to its advantage with the fund the reputation of being the star pupil among emerging markets trying to claw their way toward economic stability.

Brazilian officials came up with the Real Plan in 1994 that set the country on the path of reform, pushed through a painful devaluation of the currency in 1999 and may just be given the benefit of the doubt on future economic steps.

But there are those in Brazil who only see bad times ahead, regardless of whether the IMF loan remains intact and Lula is on his best behavior.

Jose Roberto Mendonca de Barros, a professor of economics in Sao Paulo, said the external economic situation, combined with Brazil's debt dynamics, makes him a pessimist on the country's short-term future.

"What will characterize the Brazilian economy in the coming year is a group of variables that suggest caution," Mendonca de Barros told the business newspaper Valor on Monday. "All of the projections suggest modest world growth next year and the fight for export markets will continue to be worse and worse."

But the biggest worry for Mendonca de Barros is the continuing lack of international credit being extended to Brazil and its corporations -- still viewed by foreign creditors as a huge risk.

"Indications are suggesting that credit in general will continue to be tight for one more year," he said.

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