Brazilians Samba Back To The Mall

At G. Aronson, a shop selling electronic goods and appliances in So Paulo, Maria do Carmo Alferes is comparison-shopping for a washing machine and a vacuum cleaner. Alferes, a secretary at a real estate company, along with most of the other customers this Saturday morning, is making Aronson just one stop on a citywide search for bargains. "Prices are finally starting to drop a little," she says, as her 15-year-old daughter, Camilla, and 9-year-old niece, Natalia, drift toward the stereo equipment. "So I figured it was time to look around."

To buy or not to buy: That is the question not only for shoppers like Alferes but also for the success of President Fernando Henrique Cardoso's year-old Real Plan. The plan, a mix of fiscal measures and a new currency, revolutionized Brazil by slashing monthly inflation--from 40% to 2.5%. Renewed confidence in the economy then touched off a national shopping spree. But Cardoso is on a tightrope: He needs to keep consumers buying while he pushes Congress to enact reforms that will spur more investment.

UNSOLD CARS. For the past year, Brazil's economy has been on a consumer-driven roller-coaster. The buying binge expanded Brazil's gross domestic product by 5.7% last year, up from 4.2% growth in 1993, but it threatened to reignite inflation when GDP growth soared to a torrid 10.5% annual pace early this year. Consumer debt helped fuel the splurge, with buyers using credit cards such as Visa, MasterCard, and American Express at an annual rate of $17 billion in the quarter, up from $10.3 billion in 1994. To dampen the euphoria, Cardoso tightened bank credit sharply, partly by prohibiting banks from lending against post-dated checks, which Brazilian merchants traditionally accept from customers. The consumer squeeze worked: It slashed retail sales in So Paulo by 11% between March and June and piled up 163,000 unsold cars in inventories of auto makers and dealers. When two consumer-durables retail chains went into bankruptcy, some businessmen feared the country was heading toward recession.

To avert that danger, Cardoso is cautiously unleashing Brazil's resilient consumers once again. In June, the Central Bank eased credit by lowering commercial banks' loan reserve requirements, and on July 28, it cut the interest rate on overnight interbank loans. Credit-card finance charges, still a steep 14% per month, are expected to follow the banks' interest rates down. But what's drawing shoppers such as Alferes back into stores is price-cutting by merchants, who have been forced to slash their margins for the first time since the Real Plan was launched. A 29-inch Sony TV at Aronson, for example, was selling for $1,347 in late July, down from $1,487 just a few weeks earlier. "With all the competition among stores, prices have dropped about 10%, so it makes more sense to buy now," said Denise Hajjar, an orthopedist shopping for a washing machine at Aronson with her mother.

"STABILITY IS GREAT." More important for Cardoso, Brazilians are still happy with the Real Plan's success in braking inflation. In contrast to the wild price spiral before the plan, "the stability is great," says Alferes. "We can now map out what we want to spend and plan a budget." With retail sales reviving, Brazil's GDP is expected to rack up 6% growth for the full year. And hard-currency reserves, which were $40 billion when the Real Plan was launched and which dropped to $30 billion in April as the consumer boom drew in a flood of imports, had climbed back to $39 billion by the end of July.

Cardoso still needs to use the popular support he has won with the Real Plan as leverage on Brazil's Congress to reform the economy further. He wants Congress to tighten up the budget and to open state-run sectors of the economy to private investment. The aim is to replace consumer buying with investment as the engine of Brazil's economy. "Without structural reforms, it will be very difficult to keep inflation down and maintain stability," says Fernando Martins, head of corporate finance at Banco Real, a So Paulo bank. "The next six months are crucial to the plan." Such are the high stakes as Brazilians carefully open their wallets again.

Before it's here, it's on the Bloomberg Terminal.