Forget The Samba, Brazilians Start Singing The Blues

Brazilians are hunkering down for a long, painful recession

A cluster of window-shoppers at a Sao Paulo mall admires the $400 fax machines and VCRs in the display at a Panasonic retail outlet. But no one enters the store. Inside, three bored salesmen entertain themselves by chanting into plugged-in microphones.

They should have been singing the blues. From electronics shops to steelmakers, Brazilians are hunkering down for a long recession. Industrial companies are laying off workers. Hundreds of small businesses are in danger of closing down. And multinational corporations are already reporting lower earnings as a result of the slowdown in Latin America's largest economy. The situation is likely to worsen as President Fernando Henrique Cardoso implements around $20 billion worth of tax hikes and spending cuts in a bid to slash Brazil's budget deficit and stave off a forced devaluation of its currency, the real. The fiscal plan will be backed by some $30 billion in credits from lenders led by the International Monetary Fund.

The cost of defending the real is steep. Cardoso's austerity package and interest rates of more than 40% will shrink Brazil's gross domestic product by an estimated 2% to 3% in 1999 after this year's growth of less than 1%. Unemployment, now 8%, is likely to rise sharply. Moreover, the spreading hardship frustrates the newly reelected Cardoso's hopes of lifting millions of Brazilians out of poverty and could undermine popular and congressional support for his free-market reforms.

Inside big Brazilian companies, layoffs have already begun. Steel company Acesita, which lost $32 million in the first half of the year, is cutting back work shifts and plans to slash output by up to 25% in the next six months. Cardoso's harsh measures are also accelerating a shakeout that was already under way among companies that are poorly managed or unable to obtain credit from wary banks. On Oct. 17, Sara Lee Corp. bought coffee company Cafe Seleto, making the Chicago-based company Brazil's second-largest coffee retailer. Meantime, home appliance retailer Lojas Arapua, battered by a 25% default rate on customers' long-term payment plans, is seeking a deal with creditors to restructure its $735 million debt.

Big companies that normally have access to overseas credit are also being squeezed. Earlier this year, they could obtain credit lines abroad paying little more than 10% annually for three years. But now, state-run electric conglomerate Eletrobras says it will have to use cash reserves to pay off more than $200 million worth of bonds coming due because it can't get refinancing abroad.

Hardest-hit by the skidding sales, so far, are auto and auto-parts makers. They are a labor-intensive linchpin of the economy, turning out 2.1 million vehicles last year and directly employing nearly 300,000. Sales plummeted by 22.5% in September from August as stocks of unsold cars reached record levels. On Oct. 19, General Motors Corp. launched a voluntary layoff program that could eliminate hundreds of jobs, while rivals Ford, Fiat, and Volkswagen are cutting back production sharply with measures from suspending shifts to "collective holidays" for workers. Small dealerships will close, the national auto dealers association expects, as few customers come in for more than free espresso.

POUNDING. Multinational corporate balance sheets are also being crimped by Brazil's slump. Brazilian operations are being blamed in part by analysts for disappointing earnings of companies from Coca-Cola Co. to Tupperware Co. Despite the recession, many multinationals are continuing their investment plans for Brazil, although direct inflows in 1999 aren't likely to match this year's expected $23 billion. Companies such as MCI Communications Corp. and Enron Corp., which bought stakes in Brazilian telecom and electric companies, will keep pouring in money to upgrade their acquisitions. And dozens of foreign oil companies are expected to follow the lead of Argentina's YPF, which on Oct. 19 signed the first exploration venture with former monopoly Petrobras in Brazil's newly opened oil industry.

Multinationals are looking beyond the recession to an eventual upturn. They may be right. But for now, the repeated poundings from global markets are likely to keep postponing the payoff.

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