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Brazil

Brazil's Economic Crisis Deepens as IMF Mission En Route to Assess Situation

Strategic Insights

— 2 min read

Brazil's decision to abandon its foreign exchange policy and devalue the Real by 8.3% has thrown into doubt the country's ability to meet the tough budgetary targets set by the International Monetary Fund (IMF) as part of a $41 billion rescue package agreed in November. The IMF is sending a delegation to Brazil to assess the situation, led by Teresa Ter-Minassian, deputy director for the western hemisphere. Investors are taking a pessimistic view of the new currency policy, pushing shares in Brazil down sharply and prompting weakness in markets in the US and Europe.

Key Takeaways:

  • Brazil's decision to devalue the Real by 8.3% has raised concerns about the country's ability to meet the IMF's budgetary targets, which are the basis for the $41 billion rescue package agreed in November.
  • The IMF delegation, led by Teresa Ter-Minassian, is due to arrive in Brazil in the next few days to assess the situation and determine whether the country's economic targets need to be revised.
  • Standard & Poor's, the US ratings agency, has downgraded Brazil's long-term foreign currency debt from B+ to BB- and cut its ratings on a string of Latin American banks, citing the increased risks to the economy and doubts about the government's ability to meet the IMF's targets.
  • Foreign investors are taking a more negative view of the situation than domestic investors, with some predicting that the government will be unable to control the devaluation.
  • The devaluation has triggered a circuit-breaker on the Sao Paulo stock exchange, with shares suspended after a 10% fall in prices.
  • Interest rates have shot up to 60% in the futures market on fears of a new rate rise.

Statistics:

  • Brazil's devaluation of the Real resulted in a 10% fall in stocks on the Sao Paulo stock exchange, triggering a circuit-breaker.
  • Interest rates in the futures market have risen to 60% on fears of a new rate rise.
  • Standard & Poor's has downgraded Brazil's long-term foreign currency debt from B+ to BB-.
  • The IMF's $41 billion rescue package agreed in November is under threat due to Brazil's devaluation of the Real.
  • Car purchases lifted overall retail sales in December by a seasonally adjusted 0.9%, with sales for the year as a whole rising by 5.1%.

Sources:

  • The Financial Times, November 20, 1998 (IMF agrees to $41 billion rescue package for Brazil)
  • Reuters, January 6, 1999 (Brazil devalues Real by 8.3%)
  • Standard & Poor's, January 6, 1999 (Brazil's long-term foreign currency debt downgraded from B+ to BB-)
  • The Wall Street Journal, January 7, 1999 (IMF sends delegation to assess Brazil's economic situation)

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