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Seeking growth without inflation

Brazil looks set to meet fiscal targets agreed with the IMF and also seems to have inflation under control. But fiscal discipline has rested on increasing revenues rather than cutting expenditure, a course that will eventually restrain rather than promote growth. Reform of the tax and welfare system has barely been tackled and doubts persist about whether the government has enough political clout to see it through. A key gain is that the real economy is moving out of stagnation and into growth. Jonathan Wheatley reports

Author: Jonathan Wheatley

If Brazil's economics team felt they deserved a pat on the back for the job they've done over the past 18 months, they got one on August 10. That was the day Brazil launched the biggest-ever bond swap by an emerging-market country and the country's longest-ever maturing bond, placing $5.2 billion in 40-year global bonds in exchange for existing Brady bonds. It was also the day it completed the sale of a 28% stake in Petrobrás, the state-controlled oil group, for $4.1 billion.

The success of both operations took markets by surprise and exceeded even the government's expectations. "The only way to see it is as a tremendous vote of confidence, and they've been due one for some time," says Andre Loes, chief economist at Banco Santander in São Paulo. "Carrying out the fiscal adjustment they've achieved in the middle of a recession was a very difficult job. It took enormous political commitment."

Few would contest that. There is now no doubt that the government will meet the fiscal targets agreed with the IMF following the devaluation of the real in January 1999. It seems comfortably on course, too, to meet its inflation targets, of 6% this year and 4% in 2001, which have been adopted as the new "anchor" for its floating-rate monetary policy.

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