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Brazilian Crisis – 1998/1999

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

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Brazilian Crisis – 1998/1999

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  1. Brazilian Crisis – 1998/1999

  2. 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)

  3. 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 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.

  4. 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 Crisis Cronology • Deterioration of Primary Results (Interest not Included) • Increase in Public Debt

  5. 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% Budget Deficit

  6. 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 Debt Evolution (% of GDP)

  7. Crisis Cronology • Increase in CA Deficit as a % of GDP • Increase in financial needs

  8. Current Account Deficit

  9. 1994 1995 1996 1997 1998 1999 1. Trade Balance 10,843 (3,353) (5,556) (8,365) (6,591) (1,198) 2. Services (14,743) (18,600) (21,044) (27,289) (28,799) (25,211) 3. Unilateral Transfers 2,588 3,974 2,899 2,216 1,778 2,035 Current Account (1,312) (17,979) (23,701) (33,438) (33,612) (24,374) Trade Balance

  10. Financial System

  11. 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

  12. Unemployment Rate

  13. Interest Rate

  14. Interest Rate

  15. International Reserves

  16. Foreign Exchange Rate

  17. Stock Exchange Bovespa

  18. Stock Exchange Bovespa

  19. GDP Growth

  20. GDP US$

  21. Inflation Rate

  22. Monetary Base

  23. Gross Capital Formation

  24. National Accounts

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