CONFIDENTIAL
ix
reduction in the face value of the debt*. However, for most debtors the financing
of buybacks on a significant scale would require the injection of additional
official funds or at least the diversion of money from more traditional forms of
lending.
Further details on individual countries are given below.
LATIN AMERICA AND CARIBBEAN
Brazil
25
A strong trade and current account performance has been overshadowed by a
deteriorating fiscal position and near hyperinflation. With domestic activity
weak, maintenance of a competitive exchange rate has led to a trade surplus of
$16 bn in the first 10 months of the year. Although recent figures suggest a
slowing of export growth and a pick-up of imports (partly reflecting liberalisation),
the surplus for 1988 as a whole should exceed IMF projections of $13 bn by a wide
margin and should put the current account into a respectable surplus. The strength
of manufactured exports has led to some recovery in industrial output since the
early summer but, overall, GDP is likely to remain unchanged.
26 The domestic financial position has continued to deteriorate, with the 12 month
rate of inflation rising to 812% in November after 5 successive monthly increases in
excess of 20%. Inflation is being accommodated by a loose monetary policy and
further fuelled by a growing PSBR (which itself largely reflects a sharp,
inflation-related increase in debt service payments). Fears that the economy is
heading towards hyperinflation triggered a flight from domestic currency in early
October. The government has responded by negotiating a 60-day pact with business
and labour to limit price and wage rises. To have any lasting impact, however, the
pact will need to be bolstered by tougher fiscal and monetary measures. Mailson da
Nobrega continues to battle against stiff political opposition to his plans for
reducing the fiscal deficit. So far he has retained Sarney's support, not least
because there is no obvious replacement.
*
It has to be acknowledged, however, that debt reduction could weaken adjustment incentives. The fact that Chile's self-financed buyback left the market price unchanged indicates a high degree of uncertainty as to which direction the balance of these opposing incentive effects could go.