FOOTBALL IN BRAZIL
Together with samba, caipirinha, and coffee, soccer
is one of the strongest national symbols and sources
of pride of this tropical nation. But there is much
more about Brazil than those four symbols, as the
country is well respected for its aircraft exports and,
more recently, competent economic management,
particularly under the tenure of central bank
Governor Fraga. Coach Felipão seemsmore hesitant
about choosing his team than Brazil was about the
exchange rate before the 1999 devaluation, because
he cannot make up his mind and has to draft 23
players from a 50-player strong roster.
Felipão may well be the coach, but like with the
devaluation, it is President Cardoso who will
ultimately call the shots - he already asked Felipão to
draft Romario, the mercurial and explosive striker.
With Romario, Brazil would have an R-squared line
up with Romario and Rivaldo, thus assuring the
goodness of fit of our regressions for this tournament.
But so far, Felipão has resisted the presidential
orders. There are other Rs to strengthen the team,
including two Ronaldos (one Paulista, the other
Gaúcho), and not just one, but two Juniors (one
Paulista, the other Pernambucano). Add the
intriguing names of Vampeta and Tinga to Roberto
Carlos, Júnior, Cafú, Adelson Ponga, Gilberto Silva,
and Kaká, and Brazil has a fantastic team.
STATE OF THE ECONOMY
In South Korea, the soccer team will afford to focus
solely on soccer, because macroeconomic
fundamentals are better than what they were four
years ago. Since then, Brazil abandoned its crawling
band (1999),moving to amanaged floating exchange
rate system. FDI and privatization revenues declined
somewhat since they peaked in 2000, but thanks to a
shift to growing trade surpluses, the current account
deficit has fallen faster than FDI. Today the stock of
short term external debt is smaller, while the
concentration of domestic debt maturities is smaller
than in 1998. The primary fiscal balance has shifted
to a surplus of about 3.5% of GDP from a deficit of
1.0% in 1998, mostly through higher taxes and partly
through spending cuts.
Like the soccer team, Brazilians do not have great
expectations for their economy this year, particularly
after a disappointing 2001, when the economy
performed reasonably well in light of the strong
external and domestic shocks it suffered. The
economic outlook for Brazil will improve in 2002.
The policy underpinning for Brazil is solid, based on
primary fiscal surpluses, which are likely to remain at
3.5% of GDP target agreed with the IMF, and tight
monetary policy, with real interest rates in excess of
12.0%. Industrial production bottomed during
4Q2001 and overall real GDP growth should recover
in 3Q2002, closing the year at about 3.0% on a yoy
quarterly basis and a 1.8% average for 2002. The
trade surplus continues to rise, reaching US$4.0bn in
2002, thus reducing the current account deficit below
US$21bn.
The World Cup and Economics 10 World Cup 2002
THE 2002 WORLD CUP
Despite being a legendary power in soccer, Brazil
is arriving in SouthKorea as an underdog, because
during the qualifying rounds the national team
played poorly and only just about made it. The last
time this happened was in 1994, but back then the
humbling qualifying struggle armed the team with
the spirit and determination to win the 1994World
Cup in Pasadena. Unfortunately, the team’s
current organizational disarray is reminiscent of
the team which played in the cup in 1966 in
England, when they failed to go past to the first
round after a terrible upset against a Portugal led
by the legendary Eusebio.
Yet, as a talented underdog, Brazil could surprise,
particularly if coach Felipão allowshis team just to
play some good free spirited soccer, instead of
stifling them with the defensive tactics used by
coach Zagallo, who behaved like a central planner
in France, 1998. It is highly likely that Brazil will
qualify at least to the second round, because they
have no match for them in Group C.Onwhat could
become known as the battle of debt dynamics,
Brazil’s first gamewill be on June 3 againstTurkey
in Ulsan, Brazil being the favourite on both
grounds. Things will get tough thereafter, because
for it to reach the semi-finals, Brazil will have to
defeat either Argentina, England, or France, to be
followed then by either Italy or Germany.
Capital inflows picked up thanks to sovereign and
corporate issuance in capital markets and one-off
sales of shares by the state bankBNDES. Anincrease
in debt financing more than offset the drop in FDI,
allowing BACEN to gain US$1.0bn in international
reserves in the year through April 30. Brazil has an
active 15-months stand-by and SRF programs with
the IMF, which expire in December 2002. Provided
that the government meets all the performance
criteria, theIMFentitles the government to drawup to
US$9.7bn by mid-year, if it so desires.
We believe that capital inflows will rebound after the
elections, driven by a recovery in FDI. A favourable
electoral outcome supported by capital inflows will
likely reduce Brazil risk (as measured by the
EMBI+), allowing for a reduction of BACEN’s
SELIC interest rate, and support the exchange rate.
This notwithstanding, we believe that the FX market
will remain volatile and probably weakening through
the second round of the elections, because
pre-electoral uncertainty could lower capital inflows
until there are signs that the official candidate could
win.
STATE OF NATION
In Brazil, presidential elections are on the same
four-year cycle as theWorld Cup, being conducted in
two rounds, which are scheduled for October 6 and
October 27. These elections will be more difficult
than those in October 1998, when President Cardoso
sought a second term and easily defeated PT’s
candidate Mr. Luis Inacio da Silva (Lula) in the first
round. This is probably because the official
candidate, Mr. Jose Serra (PSDB) is presently
experiencing harsh opposition from former
government allies (mostly from PFL and to some
extent some areas within PMDB) has still to prove
that he has the charisma and popularity enjoyed by
President Cardoso.
Nonetheless, we believe that the official candidate
Serra (PSDB) will likely to win against Lula on the
second round. Yet, political noise will remain very
high at least through June, because Mr. Serra still has
to appease the ruling coalition and launch his
campaign, while Lula is likely to rise further in the
polls, perhaps to the mid-40s. Recent polls released
in April and May show that Lula has regained
strength in the presidential race, remaining in first
place with almost 40% of the vote. Mr Serra is
struggling to remain in second place, being almost
tied with self-declared populist Garotinho (PPS) with
19% and Ciro Gomes (PSB).
We believe that a credible track record, the recovery
in the popularity of President Cardoso, ample support
from the media and industrial and financial lobbies,
and a strong federal investment spending budget are
all factors which are likely to turbo-charge Serra’s
campaign, propelling him to the presidential palace
in January 2003.
After theWorld Cup, the main things towatch will be
the ability of Mr. Serra to launch his campaign,
followedby the quality ofMr. Serra’s economic team
and program for 2003 and beyond.
Previous Appearances: 16
The only nation to have taken part in every World
Cup
Honours
Winners: 1958, 1962, 1970, 1994,2002
Runners-Up: 1950, 1998
Semifinalists: 1938 (3th), 1974 (4th), 1978 (3rd)
Hosts: 1950
|