Brazilian Crisis 19981999.pptVIP

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$16B) Political Stability Controlled Credit Expansion (Below 30% of GDP) What went wrong? Two Main Factors Adverse Price Shock between Jan-97 and Jan-99 Exported Products Prices fell 16% International Credit Restrictions Russian Crisis – August/98 Crisis Cronology Deterioration of Primary Results (Interest not Included) Increase in Public Debt Budget Deficit Debt Evolution (% of GDP) Crisis Cronology Increase in CA Deficit as a % of GDP Increase in financial needs Current Account Deficit Trade Balance Financial System Crisis Cronology Political Issues Itamar Franco (former President and current Governor of Minas Gerais) announced a default on the State Debt. International Agents fly out of the country Unemployment Rate Interest Rate Interest Rate International Reserves Foreign Exchange Rate Stock Exchange Bovespa Stock Exchange Bovespa GDP Growth GDP US$ Inflation Rate Monetary Base Gross Capital Formation National Accounts * * 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. Source 1994 1995 1996 1997 1998 1999 Federal 9.2 10.1 13.6 15.2 21.1 24.4 States and Municipalities 9.8 10.6 11.5 13.0 14.4 15.6 State Enterprises 7.0 6.6 5.8 2.8 2.6 2.6 Total 26.0 27.3 30.9 31.0 38.1 42.6 ? 1995 1996 1997 1998 1999 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% Source 1994 1995 1996 1997 1998 1999 Federal 9.2 10.1 13.6 15.2 21.1 24.4 States and Municipalities