South American Markets, cont.

CONTENTS: Overview | Brazil | Chile | Argentina

– Analyst Pat Jurczak,
ING Barings

Eletrobr�s
(Telecomunicacoes Brasileiras S.A.)
Web Site

Eletropaulo (Eletricidade de
S�o Paulo S.A.)
Web Site

With more than 155 million people, a land area just slightly smaller than the United States, and a gross domestic product that is almost 40 percent of the Latin American total, Brazil's economic health is of more than passing interest. Fortunately, Brazil has felt fairly well since 1994.

Brazil is still struggling to rid itself of the red tape and bureaucratic snafus that came from nearly six decades of military rule. Its economic development has been hampered by hyperinflation, high interest rates, heavy dependence on imported oil, and substantial government deficits, according to a State Department report submitted to the Senate Foreign Relations Committee. Brazil's gross domestic product grew only 1.5 percent over the 1980-93 period, according to a World Bank report, reflecting its inability to respond to external pressures such as the oil shock, real interest rate hikes, and the debt crisis.

But the nation turned around in late 1994 as a result of the Real Stabilization Plan, which initiated a tight monetary policy and introduced the country’s new currency, the Real, at parity with the U.S. dollar. Brazil had a GDP growth of 5.8 percent in 1994, 4.2 percent in 1995, an estimated 3 percent in 1996, and a projected 4.5 percent in 1997, the World Bank said. Its inflation rate dropped in 1995 to less than 70 percent, and the decline has continued. Brazil's Secretariat of Economic Policy said the inflation rate in 1996 never got above 2 percent per month. The rate in January of 1997 was 1.23 percent.

Standard & Poor’s is considering upgrading Brazil's investment rating. For almost two years, the country has been rated the least stable economy in Latin America except for Venezuela by S&P.

Brazil has moved toward free trade within MERCOSUR, the customs union it has formed with Argentina, Paraguay, Uruguay, Chile, and Bolivia, and the average tariff has dropped from 52 percent to 14 percent. However, it still imposes heavy tariffs on selected goods from outside of MERCOSUR—notably automobiles, shoes, and textiles. Telebr�s (Telecomunicacoes Brasileiras S.A.–TBR), the phone company in Brazil, is well positioned as the move toward increased communications occurs, according to analysts.

"We believe Telebr�s will continue to provide stunning growth," said Analyst Pat Jurczak of ING Barings in a "Latin American Weekly" report of February 20. The stock is trading at a significant discount, Jurczak said, predicting that a jump in revenues, a continuation of cost cutting, and a change in accounting all will benefit the stock in 1997. Line growth is forecast at 14 percent in 1997 and 13.2 percent in 1998. Cellular line growth is forecast at 99 percent growth in 1997 and 51 percent growth in 1998.

Eletrobr�s (Centrais El�tricas Brasileiras S.A.–CAIGY) and Eletropaulo (Eletricidade de S�o Paulo S.A.–traded in Brazil), both electric utilities, are stocks to consider, according to ING Barings analysts in their "Latin American Weekly" report of March 20. Privatization prospects could "unlock [the] underlying asset value" for both companies, the analysts said.