Four Years and Counting

That Brazilians still remembered the Real plan's 4th anniversary on July 1st can mean both a good thing and a bad thing. On the bright side, it is a reminder that economic stability is still maintained, considering the countless short-lived and ill-fated plans from previous administrations. Nonetheless, the attention given to a date that might otherwise be insignificant is also a sign that Brazilians are aware of the plan's vulnerabilities, and they fear that the country's future is fraught with uncertainties.

A year ago, public approval of the Real plan was all but unanimous, but now criticism and dissenting opinions have been mounting, paired with a sharp decline in President Fernando Henrique Cardoso's (FHC) popularity (a trend that has been reversed, according to the latest polls). Cardoso, a second-term candidate in the upcoming October elections, had been leading the polls by a wide margin from the beginning of the electoral race. In May, though, a poll conducted by the Vox Populi institute showed that FHC's main opponent, labor party candidate Lula, was closing the gap and trailing Cardoso by a narrow nine percentage point difference.

Voters complaints range from the rise in unemployment and social justice issues to the fact that many of the Real plan's proposals have never materialized, such as the recovery in government accounts, the approval of the social security reform and a more consistent growth of exports. In May alone, 8.20% of the economically active population was unemployed, according to IBGE (the Brazilian agency for statistical, geographic, cartographic, geodetic and environmental information.). Such poor performance of the labor market was the worst endured since 1982, and only slightly better than the 8.28% unemployment rate of May 1984, when Brazil suffered one of its worst recessions.

Pressed by such compelling matters which will mostly likely take votes away from FHC, the government at Palácio do Planalto (Highlands Palace, the Brazilian equivalent of the White House) went on to orchestrate a party in celebration of the Real plan's 4th anniversary with all the overtones of an election campaign. The incumbent President took advantage of the occasion not only to celebrate his own birthday, but to also present Brazilians with the "gift" of brand new Real coins (see related story). In his speech to launch the new coins, the President showed that he was already in the campaign trail, although officially no electoral campaign was supposed to begin before August 18. "With the Real, we've rescued 13 million Brazilians from poverty. So, how can one say that we overlook important social issues?", Cardoso asked, defending himself.

In his eagerness to prove his point, FHC went even further and managed to disregard international protocol by leaking unreleased data from the United Nations that show Brazil's improved performance in the world ranking. The report, published annually by the United Nations Development Program (UNDP), contains updated Human Development Indicators of over 175 countries. Countries are classified as one of three different developmental levels—low, medium and high—according to indicators such as life expectancy, education and income, among other things.

The last UNDP's report has ranked Brazil in the medium-range level, but according to Cardoso, the country will now be ranked in the high-range level in the upcoming report. Since the report's release is tentatively scheduled for September, FHC's announcement was a cause of chagrin at the United Nations headquarters. The President's privileged information was only possible because Brazilian governmental entities also participate in the UNDP's data gathering process. Moreover, the report will be based on data collected in 1995.

In fairness to FHC, the Real plan did lower Brazil's poverty rates. In 1997, 25% of the population lived under the poverty line compared to 35% four years ago. The increase in buying power was reflected in Brazilian consumer habits, as the lower-income population was finally able to buy many products once accessible only to the high middle-class.

According to studies conducted by the government, as well as by independent institutions, the economic stability accomplished by the Real plan was responsible for the sale of over 10 million color TV sets in the past four years. That accounts for 69.2% of Brazil's homes with at least one color TV set compared to 50.2% in 1993. Refrigerator sales jumped from 71.7% in 93 to 78.2% in 1996. As for food consumption, meat sales increased 27% since the plan was implemented, and chicken consumption rose 39.9%. In the same period, sales of soft drinks were up 71.5%, cheese, 51.8%, while yogurt sales increased 85.9%.

If unemployment rates have soared in the past months, it is largely due to the tough measures adopted by Cardoso's administration in October 1997, after the Asian market fall-out. Fearing that an economic crisis similar to that in Asia might spread throughout Latin America, the Brazilian government was compelled to devise an austere fiscal plan, followed by an astronomical increase of the annualized prime lending rates to a whopping 43.3% in November. Since then, Banco Central (Central Bank) has cut interest rates to 19.75%, but consumer demand is still sluggish.

On the other hand, Brazil registered a trade surplus of $12 million last June, after two consecutive years of trade deficit. Economists agree that the posted surplus is not significant, and is largely due to the economic slowdown that ensued from the Asian crisis. As the year progresses, followed by the traditional rebound of economic activities in the second semester, imports will again outgrow exports.

Only by having a consistent trade balance surplus can Brazil be less dependent on foreign capital, which is greatly responsible for the nation's current international reserves of $72 billion. The positive recovery in reserves and the approval of important constitutional reforms have increased investors' confidence in Brazil. In 1997, foreign companies were responsible for $13 billion in investments through mergers and acquisitions involving over 200 deals with Brazilian enterprises.

Analysts point to an increase on import tariffs and changes in the current exchange rate policy as the only ways to maintain a trade surplus, none of which is likely to happen any time soon. Even if government officials agreed that the Real is still overvalued, currency devaluation could trigger a financial crisis and a return to inflation, which would derail Cardoso's re-election plans.

As far as the budget deficit is concerned, the government seems to be moving towards a more lenient fiscal stance because of the upcoming elections. Comfortable with the country's reserves, but pressed by Lula's performance on the polls, the government decided to give a 28.86% pay raise to all federal employees and to revoke a 12% budget cut in federal expenditures which had been decided after the Asian crisis.

The ongoing privatization program, especially its latest deal—the Telebrás auction (see related story)—is giving the government some space to breathe in face of the worrisome fiscal deficit. If elected, though, FHC had better start thinking about other ways to pay for his pre-election generosity.

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Real Big
Business

On July 29, the Brazilian government sold the Telebrás system, its most lucrative enterprise, in an auction considered to be the second largest privatization in the history of the telecommunications sector worldwide. The entire Telebrás system sold for $19 billion, $7.3 billion more than the established minimum price of $11.7 billion.

Seventy six national and foreign companies registered to participate in the ambitious privatization deal, including telecom heavyweights Sprint, MCI, Telefónica de España, Telecom Italia and Japanese NTT, to name a few.

At the end of the auction, which lasted only four hours, Telefónica de España came out as the big winner after acquiring Telesp (from the state of São Paulo), Brazil's largest fixed-line telephone operator, and by participating in several other winning consortia. Altogether, the consortia in which Telefónica participated paid $6.4 billion for three telecom companies, including Tele Leste Celular, the cellular market covering the states of Bahia and Sergipe. This amount represented 35% of the auction's total receipts.

According to Juan Villalonga, Telefónica's president, the company's aggressive participation in the Telebrás privatization deal is justified by the economic importance of Brazil, which represents one third of the Iberian-American market. Moreover, the Spanish company is determined to be a leader in the Latin America telecommunications sector, in which Telefónica is already one of the major investors. Its participation in the market includes holding of 45% of Chilean CTC's shares, 31% of the Peruvian telecom and 25% of the Argentinean system.

Another winning bidder in Telebrás' auction was Telecom Italia, which was Telefónica de España's main competitor in the bid for Telesp's control. In spite of losing the battle, the consortia in which the Italian enterprise participated acquired three companies for a total of $2.9 billion—16% of the auction's receipts.

On another front, American MCI beat out rival Sprint for control of long-distance carrier Embratel after a dogged dispute that ended in ten minutes of intense verbal bidding exchanges. The acquisition of Embratel now represents MCI's largest operation outside the United States.

Just as with the privatization of mining giant Companhia Vale do Rio Doce (CVRD) last year, the Brazilian government faced another avalanche of lawsuits and court injunctions trying to suspend Telebrás' auction. In anticipation of the judicial battle that would inevitably ensue, the government put together a team of 400 top-notch lawyers to work on overturning the injunctions.

Street demonstrations also took place in several major Brazilian cities, but these were far fewer than the protests that erupted against CVRD's privatization. Among the threats from anti-privatization factions, there was an anonymous phone call to Embratel alleging that a bomb had been planted in its headquarters in Rio de Janeiro, which proved to be a hoax.

One of the main reasons behind the government's decision to privatize Telebrás was the company's failure to meet the demand of Brazilians waiting for a telephone line. In state capitals such as Rio de Janeiro and São Paulo, people often have to wait up to two years just to have a new line installed. There are currently 17 million Brazilians waiting for a conventional line and some other 7 million waiting for a cellular line. As increasing numbers of Brazilians are buying personal computers and logging on the Internet, the demand will continue to rise in the following years.

The government predicts that within four years, 22 out of 100 Brazilians will have fixed phone lines, double the current line/person ratio of 11 to 100. In the year 2007, this ratio is expected to increase to 30 : 100, and 9 out of 100 inhabitants will have a cellular line by then.

Apart from the painful wait for a line, which should be reduced to one week by the year 2005, Brazilians are also hopeful that Telebrás' privatization will bring about lower rates and greatly improve the quality of the precarious telephone connections. In Rio de Janeiro, frustration with Telerj, the local phone company, runs so high that it led one of its subscribers to create the Eu Odeio a Telerj (I Hate Telerj) Web site—http://www.pagebuilder.com.br/odeioatelerj/welcome.htm—where Cariocas (Rio's natives) could vent their anger against the company. Their tales, complaints and diatribes range from the bizarre to the ridiculous.

Telebrás privatization has restructured the system, which used to consist of Embratel and 26 other companies (one for each state, with the exception for Tocantins state) into 12 separate enterprises: 8 cellular companies, 3 conventional line operators and Embratel.

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The Real's
New Faces

After four years in the making, 85,500 new coins were issued by the Brazilian government, the first batch in a process that will ultimately replace over 5 billion coins currently in circulation in Brazil.

The exact cost of the whole operation is unknown, but it is estimated that $48.6 million alone were spent by the Brazilian mint to import the Canadian equipment used in the coins' manufacturing. An additional $2.5 million were spent by Central Bank—with financial help from state-owned Banco do Brasil (Bank of Brazil) and Caixa Econômica Federal (Federal Savings Bank)—on the promotional campaign that preceded the launching of the new coins. Another $256 million will be spent on this project over the next five years.

Unlike the old stainless steel coins, the new ones are made out of nickel, copper and brass, and come in different shapes and colors. According to Brazilian officials, since the Real has become the nation's new currency, the population has expressed a wish for coins in varied shapes and colors. However, opponents of the project argue that such spending is a frivolous waste of money, considering the urgent financial needs of social areas such as health and education.

The new family of coins is designed around the theme of Brazil's history, which is portrayed on the coins. So, the 1-cent coins have the figure of Pedro Álvares Cabral (Brazil's official discoverer) stamped on them. The 5-cent coins have Independence martyr Tiradentes on them. The-10 cent coin shows emperor Pedro I—an allusion to the country's monarchy era—and the 25-cent coin bears a likeness of Marshal Deodoro da Fonseca, representing the implementation of the Republic in Brazil. On the 50-cent coins, an image of Baron of Rio Branco and a map of Brazil pay tribute to a historic figure who played a major role in the peaceful negotiations to establish the country's borders. The Republic emblem, which is currently stamped on the 1-real coins (one real was worth 0.8532 cents in mid-August), will remain unchanged.

Marta Alvim is a Brazilian journalist, freelance translator and interpreter. You can reach her at mltdalvim@yahoo.com

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