Nov. 4 (Bloomberg) -- Brazil said it expects to reach agreement with the International Monetary Fund as early as tomorrow on a new loan accord that may be its last as surging exports and a revival in consumer spending help restore investors' confidence in South America's largest economy.

IMF Deputy Managing Director Anne Krueger is scheduled to meet Finance Minister Antonio Palocci tomorrow in Brasilia to discuss the agreement, Treasury Secretary Joaquim Levy said at a press conference in Brasilia.

The government has proposed a one-year accord to signal its commitment to meeting deficit-cutting and inflation targets, and hopes to stop receiving IMF financing by the end of 2004, said Otaviano Canuto, the Finance Ministry's international affairs secretary. The government's stance underscores signs the economy has pulled out of its steepest quarterly contraction since 1998.

``With the economy growing, it will become easier to achieve the goals we set ourselves,'' Canuto said in an interview in Sao Paulo. ``Then we will be able to leave the space we take up with the fund and leave it open for another economy that may need it more.''

Brazil's optimism that it can abandon IMF-led funding agreements by the end of next year may be overstated given the country's high debt levels, said Raphael Kassin, who manages $900 million in emerging market bonds, including Brazilian debt, at ABN Amro Asset Management in London. Brazil's debt, which rose to a record 1.2 trillion reais ($420 billion) in August, is equivalent to 78 percent of gross domestic product, about double Mexico's debt ratio.

`Debt Burden'

Brazil ``definitely needs a new accord,'' Kassin said. ``Brazil can only manage to stay afloat without any kind of IMF accord when its debt burden is about half what it is now.''

Brazil's long-term foreign currency debt is rated B2 by Moody's Investors Service, five levels below investment grade, and B+ by Standard & Poor's, four levels below.

``It's crystal clear for the government that it needs to keep moving step by step in right direction,'' Canuto said. ``I don't mean the problems are finished.''

Still, the country is in a stronger position negotiating with the IMF a year after the government secured a $30 billion loan commitment from the fund in September 2002 to help stave off a slump in the nation's bonds and currency.

Bonds, Currency

The benchmark 8 percent bond due 2014, which fell to about 49 cents on the dollar just before Luiz Inacio Lula da Silva was elected in October last year, has doubled in price since then. The currency, which lost a third of its value against the dollar in 2002, has gained 24 percent this year.

Today, the benchmark bond rose 0.31 cent on the dollar to an offer price of 94.19 at 4:52 p.m. in New York, cutting the yield to about 9.5 percent, according to J.P. Morgan Chase & Co. The currency fell 0.2 percent to 2.578 per dollar.

Lula helped restore investors' confidence by making the biggest government spending cuts in history and bringing down inflation. That's allowed the central bank to cut the overnight interest rate five times since June to 19 percent.

The bank may reduce its benchmark interest rate further, bolstering an economic recovery that's being propelled by a surge in exports that may swell the trade surplus to above $20 billion this year, said Alexandre Schwartsman, the central bank's new director, responsible for bond sales, said in a speech in Brasilia.

Brazil's economy probably grew in the third quarter after shrinking 1.4 percent in the second quarter from the same period last year, Canuto said. This year's growth may beat the government's own forecast for about a 1 percent expansion this year, Canuto said.

Consumer Spending

The rate cuts since June have started to spur consumer spending, while commodities companies such as steel, soybeans and iron ore producers are boosting exports, Canuto said. Some banks, such as ABN Amro Holding NV, are predicting an economic contraction in the third quarter and slower growth for the full year than the government's forecast.

There are more signs demand in the economy is picking up. Banco Itau Holding Financeira SA, the fourth-biggest bank, expects lending to grow 10 percent in the final quarter and 20 percent in 2004, said Silvio de Carvalho, an executive director of the bank in a conference call for reporters.

Carvalho said the bank detected an increase in demand for credit since the middle of September. Other indicators point to a recovery in September: Exports rose 14 percent from August while imports surged 24 percent and manufacturing output in Sao Paulo, Brazil's wealthiest state, rose 5.5 percent.

Optimism

The bank bought back $3.2 billion in international bonds so far this year, more than the about $3 billion it repurchased in 2002, reducing debt payments during Lula's term by $638 million, said central bank president Henrique Meirelles at a speech in Brasilia.

Meirelles estimates the buybacks will save an additional $1.2 billion through the end of 2006.

Brazil is committed in its current IMF accord to set aside the equivalent of 4.25 percent of GDP from its budget for debt- servicing and keep at least $5 billion in international reserves, among other conditions.

Palocci said in an interview last month that the government would seek better terms in the accord, given that ``markets perceive good things about the country's performance and its outlook.''

Jorge Marquez-Ruarte, the head of the IMF's visiting team in charge of reviewing terms of the accord, said at a press conference in Brasilia that it's important for the government to sign a new loan agreement.

``It is beneficial for Brazil to stay in on an accord with the fund,'' Marquez-Ruarte said.

Last Updated: November 4, 2003 16:54 EST