Brazil markets up as Lula gains allies in Congress

www.forbes.com Reuters, 02.03.03, 9:58 AM ET By Todd Benson

SAO PAULO, Brazil, Feb 3 (Reuters) - Brazil's financial markets edged higher early on Monday after President Luiz Inacio Lula da Silva gained support over the weekend for his reform agenda in Congress. The country's currency, the real , strengthened 0.6 percent to 3.5 per dollar, gaining ground against the greenback for the fourth straight session. Stocks rose in tandem with the currency, lifting the Sao Paulo Stock Exchange's benchmark Bovespa <.BVSP> index 0.64 percent to 11,010.9 points in modest trade. Though fears of U.S.-led war against Iraq continued to weigh on sentiment, markets headed higher after the Lula government managed to rally additional congressional support for its ambitious economic reform agenda, topped by plans to overhaul Brazil's cumbersome pension and tax regimes. Over the weekend, legislators elected two key Lula allies to lead the Senate and the lower house, both of whom pledged to aggressively push the president's agenda in Congress. Lula was also the beneficiary of some last-minute party defections, seeing his support base in the house swell by 11 percent to 254 seats. While that leaves the government three seats short of a simple majority, at least a third of the opposition is willing to support Lula, giving him more than the 308 votes necessary for constitutional reform. Moreover, further defections in favor of the government are expected before Congress resumes work on Feb. 17. "Things are shaping up well for the government in Congress, and that bodes well for the reform agenda," said Pedro Thomazoni, treasury director at Lloyds TSB in Sao Paulo. Another factor underpinning the market were expectations that the government will raise its primary budget surplus later this week in a move that could make it easier for the country to service its $250 billion public debt. Last week, Brazil posted a record primary surplus for 2002 equivalent to 4.06 percent of gross domestic product, stirring hopes in the market that the government will hike this year's target to at least 4.3 percent of GDP, well above the current goal of 3.75 percent. "My feeling is that the market still hasn't fully priced in an increase in the surplus target, so that could be a nice surprise for the market this week," said Eduardo Duarte, head of the currency desk at Banco Prosper in Rio de Janeiro. In the stock market, Brazil's No.1 private bank, Banco Bradesco SA <BBDC4.SA> (nyse: BBD - news - people), was among the early leaders. Bradesco shares climbed 1.62 percent to 10.05 reais after the bank posted a better-than-expected fourth quarter profit of 698 million reais. In the beverage sector, stock in beer giant Companhia de Bebidas das Americas, or AmBev <AMBV4.SA> (nyse: ABV - news - people), edged up 0.2 percent to 506 reais after it said it had wrapped up a $600 million deal to buy a 36 percent stake in Argentine brewer Quilmes Industrial (Quinsa) <QUIN.LU>. Among energy companies, shares in Sao Paulo-based electricity provider Eletropaulo SA <ELPL4.SA> rose 1.65 percent to 28.97 reais amid heavy speculation the firm could be brought back under government control. On Friday, Eletropaulo's parent company, U.S. energy giant AES Corp. (nyse: AES - news - people), failed to make an $85 million debt payment, putting the group in material default with Brazil's National Development Bank, the BNDES.