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In the period from 1997 to 1999, a series of financial crises that culminated in the Russian moratorium led capital to exit from emerging markets, resulting in significant reserve losses to Brazil and other emerging economies. In January 1999, the government was then forced to let the currency (then pegged to the US dollar) float. The transition to a floating exchange rate regime and the monetary policy followed by the Brazilian Government was a remarkable success. The recession was short-lived, the Real quickly stabilized and inflation subdued. The success owed to a great extent to Brazil’s strong commitment to structural fiscal equilibrium and economic reforms. These policies have restored market confidence in the country’s economy. The successful transition in early 1999 to a floating exchange rate regime was due mainly to a rigorous fiscal adjustment program conceived to ensure long term stability of fiscal accounts. The program included such measures as the Fiscal Responsibility Law, which was approved by Congress in 1999. This comprehensive piece of legislation consolidates Brazilian fiscal management directives and establishes limits for personnel expenditures at the federal, state and municipal level. Despite significant depreciation of the Real the annual inflation rate of 1999 was contained at 8.9 percent. This was mainly a result of the introduction of a new framework for monetary policy, based on inflation targeting, that consolidated the efforts of attaining sustained reduction in inflation. The strength shown by the Brazilian economy derived not only from the firm implementation of macroeconomic policies mentioned above, but also from the substantial structural reforms introduced earlier since the launching of the Real Plan in 1994. In particular, the restructuring of the banking sector and the strengthening of prudential regulation and supervision of the financial sector undertaken since 1995 were important elements for the economy to withstand external shocks. This reform agenda will continue to be pursued in areas such as public finance, social security, and deregulation, which are essential to increase domestic savings, improve competitiveness, and economic welfare, and will provide a suitable environment for the continued recovery of domestic demand and for the achievement of a higher growth rate with low inflation in 2000 and beyond. It should be noted that, in spite of the economic crisis of 1999, Brazil continued to follow the trade liberalization path that has been a characteristic of the country’s economy in recent years. In fact, as a result of trade reforms, Brazil has become an open economy, with low tariffs and no quantitative restrictions to imports. The average tariff came down from 32 percent in 1990 to 14 percent as of 1999. One of the consequences of trade liberalization was a surge of imports that submitted the industry to strong competitive pressures and brought about continuous trade deficits. Nevertheless, in 2000, Brazil expects its first trade balance surplus since 1995. As of June 2000, the accumulated surplus reaches US$ 856 million and a total of US$ 5 billion is expected for the whole year. Even though a part of this improvement in the trade balance is due to the realignment of the exchange rate, it is not wrong to say that productivity gains and increasing competitiveness of the Brazilian industry also played a role on it. Exports are growing steadily especially in value added sectors such as aircraft and telecommunications. Destinations are diversified: the European Union absorbs 27%, North America 23% (the U.S. is the largest individual trading partner), Mercosul 14%, Asia 10%, and the remaining exports are distributed over a variety of smaller markets. With a GDP of US$ 650 billion in 1999, the Brazilian economy is dynamic and diversified. Industry accounts for 20% of national production, agriculture for another 20% and the services sector for 60%. The dynamism of the economy could be assessed through the volume of foreign direct investment (FDI) that flew into the country in recent years. FDI, that was very low in the beginning of the 1990’s, has increased to US$ 5,5 billion in 1995, US$ 10,5 billion in 1996, US$ 18,7 billion in 1997, US$ 28.5 billion in 1998, reaching a historical level of US$ 30 billion in 1999, the fourth in the world and the highest among developing countries except for China. An important fraction of this FDI was directed to the massive privatisation program implemented by the Brazilian government, which ended long lasting state monopolies and moved into private hands important sectors of the Brazilian economy such as steel, telecommunications and electricity. For more information, see the Economy Section of this website. [Top]