Iraq war could lead to a stagnation of Brazil's economy

www.puertoricowow.com Sunday, February 2nd, 2003.  

RIO DE JANEIRO, Brazil (AP) - A possible U.S. attack on Iraq could choke off a moderate recovery of South America's biggest economy, analysts said Sunday.

High petroleum prices on international markets that led to several gasoline price hikes in Brazil in recent months have already contributed to an acceleration of Brazil's inflation rate from 5.6 percent in September to 12.5 percent in December, according to the official statistics institute.

"The longer the current impasse on a possible war continues, with a consequence of even higher oil prices, the greater the damage for Brazil's economy," Hugo Penteado, chief economist at ABN Amro in Sao Paulo, told The Associated Press over the telephone.

To reign in inflation, Brazil's central bank in January hiked benchmark interest rates to 25.5 percent from 25 percent, slowing economic growth. Yet, Brazil's economy could still expand 1.5 percent this year, if a quick decision on whether to attack Iraq would be made, Penteado added. If there is a short war or with a peaceful solution, oil prices should stabilize little later, and the effect on Brazil's economy would be moderate.

But in the case of a conflict lasting four months or more, Brazil's economy could suffer both from higher oil prices pressuring inflation and from a drying up of investment flows to emerging economies due to a slowdown or recession in the U.S. economy, Penteado said. In that case, economic growth in Brazil could be close to zero, he added.

The current atmosphere of uncertainty about a war, has also harmed the value of Brazil's currency, the real, making imports more expensive, which again pressures consumer prices.

After Brazil's new President Luiz Inacio Lula da Silva took over on Jan. 1 and started to signal a continuation of moderate economic policies, the real initially gained ground, strengthening to 3.33 to the dollar by mid-January. But as war fears heightened, the real fell back again, closing at 3.515 to the dollar on Friday.

"The exchange rate stability depends on whether a U.S.-Iraq war will be quick (or not)," said Odair Abate, chief economist at Lloyds Bank in Sao Paulo.