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January 18, 1999
 
 
Brazil eyes gloomy economic future
 

                  SAO PAULO, Brazil (Reuters) -- Brazil may have carried out one of the
                  developing world's first successful devaluations, but its economic troubles
                  are far from over.

                  For years many analysts said devaluation would be the answer to Brazil's
                  sluggish economic growth that has swelled unemployment lines and forced
                  millions of families to eke out a living on the street.

                  They argued a weaker currency would allow sky-high interest rates to fall
                  and exports to grow, generating new jobs for Brazil's fast-growing, young
                  work force.

                  But far from ushering in a new period of rapid growth, the devaluation of the
                  Brazilian real is widely seen as aggravating a recession that was already set
                  to cripple the world's eighth-largest economy this year.

                  "Historically, devaluations are very negative for the economy in the
                  short-term," said Carlos Kawall, chief Brazil economist for Citibank. "We
                  expect the economy to shrink by 5 percent this year, compared to a 3
                  percent contraction we forecast prior to the devaluation."

                  If Kawall is right, it would be Brazil's worst economic performance in the
                  last three decades.

                  A strong real, backbone of the anti-inflationary Real Plan, gave Brazil its first
                  period of economic stability in years after its launch in July 1994. The
                  currency helped lift millions of Brazilians out of poverty simply by stopping
                  hyperinflation, which boosted their purchasing power.

                  But Brazil's economy paid a heavy price for a strong currency, growing at a
                  yearly average of 2.8 percent beginning in 1994, well below the
                  government's original target of a steady 5 percent growth rate by the year
                  2000.

                  As a result, official unemployment now stands at about 8 percent, heading
                  for 10 percent to 11 percent in 1999. The unofficial jobless rate, which
                  includes workers not officially registered as unemployed, is seen passing 20
                  percent in 1999.

                  Most Brazilians have survived in this tight job market by swarming into the
                  informal economy, where they make a living shining shoes, selling gum and
                  cleaning car windscreens at traffic lights.

                  Some estimates say 40 percent of Brazil's working population earns its
                  income in the informal sector.

                  Unable to control its own spending over the past four years, the Brazilian
                  government was forced to keep interest rates high to attract dollars in its
                  relentless bid to support the real. Brazilian interest rates averaged more than
                  20 percent and often topped 40 percent in the period.

                  Now that the real has weakened, however, economists say Brazil still has
                  little room to lower rates from a current 30 percent.

                  Policy-makers-- including International Monetary Fund officials who
                  brokered a $41.5 billion bail-out package for Brazil last year-- believe high
                  rates are essential to maintain market faith in Brazil's new "free float"
                  foreign-exchange policy.

                  Inflation is also expected to rise to about 7 percent from zero in 1998, which
                  will limit the space for a rate cut.

                  Essentially, high interest rates will remain until Brazil's Congress
                  demonstrates it has the stomach to pass unpopular austerity measures,
                  economists say.

                  "The devaluation seems quite successful compared to Mexico's and South
                  Korea's, but it doesn't resolve the problem of our big budget deficit," said
                  Marcel Allain, chief economist at BMC Bank in Brazil.

                  Even if congress comes through quickly with fiscal austerity and rates do fall,
                  the belt-tightening at the federal level will still keep a lid on economic growth
                  by cutting investment and consumption, analysts say.

                   Copyright 1999 Reuters.