BRASILIA, Brazil (Reuters) --
Brazilian stocks slid to their lowest
level in more than two years Thursday, casting a shadow over the impending
general elections in Latin America's biggest economy.
Shares on the Sao Paulo stock exchange had tumbled 8.6 percent by the close
of trade after U.S. ratings agency Moody's Investor Services downgraded
Brazil's foreign currency debt, saying the country was more vulnerable
to
swings in investor confidence.
"Whoever had any doubt the situation was terrible doesn't any more," one
trader said.
A spokesman for President Fernando Henrique Cardoso said Moody's was
treating Brazil unfairly.
"The rating agencies are being cautious, especially in the aftermath of
the
Asian crisis, when they were caught by surprise," the spokesman said.
"Unfortunately, they are showing mistrust in relation to emerging markets
in
general."
Difficult to attract dollars
Earlier Thursday, as Latin American finance chiefs gathered in Washington
to
discuss the impact of Russia's crisis on the region, Cardoso conceded Brazil
was finding it hard to attract the dollars needed to plug a huge budget
deficit.
"Is the country vulnerable? Yes. There are various aspects that we must
face," said Cardoso, who is seeking re-election on October 4. "We've not
done
it all, but we have done a lot."
Cardoso insisted that Brazil was not about to devalue its currency, as
its
neighbor Colombia did Wednesday.
"Brazil does not have the vulnerability of those countries that are basically
exporters of commodities," he said at a news conference.
The briefing was called to launch Cordoso's election manifesto, but it
was
dominated instead by questions about the volatile markets.
"Russia's problems have nothing to do with Brazil," Cardoso said.
Cardoso favored in election
Cardoso is favored to win a second term next month, having slashed inflation
from about 5,000 percent a year in 1994, when he was elected, to an
estimated 1.5 percent in 1998.
A poll published Thursday gave him 44 percent of the vote, down 2 percent
from mid-August, while left-wing Luiz Inacio Lula da Silva was second with
25 percent, up 3 percent.
Despite the slight narrowing of his lead, Cardoso could still win the election
outright in a first round, by mustering more votes than all of his rivals
combined, the poll said.
That could change if Brazil is forced to devalue the local currency, the
real,
which is the anchor of Cardoso's anti- inflation drive but is widely considered
overvalued.
Economists fear Brazil may lose the faith of already nervous international
investors. In August, the value of shares fell nearly 40 percent in the
wake of
Russia's crisis.
Huge drop in foreign reserves
Last week, the Central Bank cut taxes on foreign investors in the hope
of
keeping dollars in Brazil and plugging a $3 billion fall in foreign reserves,
which
now stand at about $65 billion.
The reserves are Brazil's best weapon to defend the real and are still
high
compared with Russia, which now has just $13 billion.
Despite the Central Bank's move, however, nearly $1.4 billion left Brazil
in the
first two days of September. Foreign exchange traders said Thursday that
state-owned Banco do Brasil was selling dollars to prop up the real.
Urgent need for reforms
At his news conference, Cardoso said reform of Brazil's loss-making social
security system -- which has been stuck in Congress for more than three
years -- was needed more urgently than ever, along with an overhaul of
the
complicated tax system.
"Stability depends on the reforms," he said. "We have to continue with
a
permanent program of fiscal adjustments, not a package."
Cardoso reiterated a pledge not to cut spending or hike taxes after the
elections.
He also said he planned to keep his key duo of Finance Minister Pedro Malan
and Central Bank President Gustavo Franco, if he wins the elections.
Malan and Franco are Cardoso's monetary hawks, and their reappointment
would probably mean that public spending would continue to be kept under
a
tight grip.
Other pledges in Cardoso's election manifesto include the creation of 7.8
million jobs by 2002, better education and health services and development
of
Brazil's impoverished interior.
Copyright 1998 Reuters Limited.