Heavy foreign debt upstages Brazilian inflation-watch
The long-simmering problem of Brazil's growing foreign debt, today at nearly The debt, the largest of any developing country, even surpasses in urgency the more than 100 percent inflation rate.
Possible renegotiation of Brazil's foreign debt has become the subject of prime-time television debates, press coverage, round-table economic conferences, and general wide-spread discussions. In the words of Mario Henrique Simonsen, former minister of economic planning and now a director of Citicorp in New York, "inflation hurts, but balance-of-payments deficits kill."
For the actual minister of economic planning, Antonio Delfin Netto, and most of his government colleagues, the thought of possible renegotiation is unthinkable. Any such suggestion is "totally irresponsible," warns the minister , "as it would cut off the flow of new loans the country desperately needs, and then Brazil will be in a real recession, with large-scale unemployment and scarcity of necessities."
An economist, Adroaldo Moura da Silva, adds: "The moment the foreign banks stop loaning, imports will stop, factories will stop, and the whole country will come to a standstill."
The solution, it is pointed out, is to apply stronger breaks on economic expansion, concentrate on exports, and reduce imports to the very minimum. some even recommend that Brazil swallow its pride and apply to the International Monetary Fund for assistance, which the government has persistently refused to do.
Up to now Brazil has been scrupulously meeting its obligations by new borrowings and the simple expedient of "rolling over" the maturing loans. But it is a question of how long foreign creditors will accede to this, especially since Brazil is already in the midst of one of the worst recessions with no signs of any improvement in the balance of payments.
According to official figures published by the central bank, the nation's foreign debt on March 31 stood at $54.5 billion, broken down in the following broad categories:
Billions Foreign bank loans mostly to government entities $28.4 Foreign bank loans to Brazilian banks $10.4 Import financing by US and foreign agencies $6.6 Private import financing $5.4 Other indebtedness 3.7 Total $54.5
By midyear, foreign indebtedness rose $1.8 billion more, and the central bank estimates that it will reach at least $60 billion by year-end. On the other hand, the dwindling foreign-exchange reserves were down to $6.2 billion on June 30, from a peak of over $10 billion in 1979.
The bill to be paid by Brazil this year is $19.5 billion --- $7.5 billion in interest rates, $8 billion in maturities, and $4 billion for various financial fees. So far, Brazil can only count on receiving $4 billion in new foreign investments and import credits. That leaves $15 billion, of which $10.3 billion has already been obtained in the first six months. Authorities do not anticipate any difficulty in borrowing the remaining $4.7 billion.
Critics of Brazil's economic policy include not only opposition political leaders but also a large segment of the business community. They claim that a substantial share of foreign loans over the year went down the drain in various projects badly conceived and executed, never completed, and illicitly enriching numerous contractors and high-up politicians. It is estimated that illegal personal Brazilian holdings abroad may be as high as $40 billion.
Critics also feel some economic policies are inconsistent. Recently the central bank disclosed that Brazil has over $1 million in credits extended to Poland.
A leading industrialist, Antonio Ermiro de Moraes, and a well-known professor , Maria da Conceicao Tavares, are advocating renegotiation as "a basic step to free Brazil's economy from external turbulences of international recessions and high interest rates."
Celso Furtado, former minister of economy in the early 1960s and a prominent economist who spent years lecturing at the Sorbonne, maintains that each "rolling over" or extension of a loan already constitutes in fact a renegotiation, usually at higher interest.
A somewhat different view is taken by Chandra Hardy, chief of the division of financial studies at the World Bank and author of a study of 46 cases of debt renegotiations in the past 35 years. She places Brazil in a special category because "the very size of the foreign debt would make foreign bankers hesitant to curtail drastically the flow of new loans."
In the opinion of Irving Friedman, international consultant to the First Boston Corporation and a former vice-president of Citibank, said in the Brazilian magazine Istoe, "The banks would find a way if Brazil would seek renegotiation, probably continuing the refinancing of the existing debt, although this would weaken Brazil's credit standing." He thinks, however, that in view of Brazil's strong base with the banks, renegotiation is unnecessary.
This opinion appears to be shared by the majority of creditor banks. George Betts, director of the international division of the Bank of London & South American, says categorically: "There doesn't exist a single international creditor today who suffers from insomnia because of Brazil."
But the strongest defense of Brazil's foreign debt comes from its biggest creditor. In a recent-affairs magazine, Veja, Gesualdo A. Costanzo, vice-chairman of Citicorp of New York, expressed surprise over the debates on renegotiation. He thinks Brazil has passed the most critical period. "At the end of last year," he says, "many bankers were pre-occupied with Brazil, but the steps taken to improve the economy have changed the perspective, and the loans are flowing in."
In his estimation, the mere size of the indebtedness means little. It's necessary to examine the entire dimension of the economy. As long as the growth of the debt accompanies the growth of the economy, Mr. Costanzo sees no reason to interrupt the process.
More than $25 billion of Brazil's total foreign indebtedness, or 46 percent, falls due between now and the end of 1984, with $7.1 billion due next year. There will be no substantial reductions in maturities until 1989, when they will fall to $2.8 billion. These figures do not account for interest rates and frequent devaluations of the cruzeiro against the dollar.
One area relatively free of financial worry is Brazil's trade balance. Exports this year are expected to increase 15 to 20 percent, but essential imports also continue rising. In the first seven months of the year the trade deficit amounted to the relatively small sum of $182 million, and it is generally conceded that Brazil may break even in its trading account.