Brazil mulls its own bailout as it heads to G20

Brazil, home to Latin America's largest economy, may be the next country to announce an economic stimulus plan, a move that could inject a measure of stability into its equity and currency markets, analysts said.

Alfredo Coutino, Latin American economist at Moody's Economy.com, said he expects "an aggressive" fiscal stimulus for next year that could include tax deductions, subsidies, and more spending on social programs," in addition to already announced liquidity-boosting measures.

Latin American neighbors Chile and Mexico have already announced more than $6 billion in extra spending designed to shore up their economies. Fellow emerging-markets powerhouse China is pumping $586 billion into its economy.

A comprehensive stimulus package is "the missing piece" from Brazil, Coutino said.

An announcement could come as soon as the completion of this weekend's emergency meeting of the Group of 20 in Washington, D.C.

Brazil's Central Bank President Henrique Meirelles told Bloomberg earlier this week that the country will consider a stimulus package after first evaluating the impact of its previous efforts to loosen its credit markets.

Brazilian finance minister Guido Mantega has supported a package that spreads funds on infrastructure and social programs, as well as doles out tax breaks, Coutino said.

A message to the markets

Like China's, a Brazilian stimulus plan could include outlays on some previously announced or modified projects.

The market is a market of perception and sometimes it takes proper packaging to have something interpreted the right way," he said.

Brazil landed this year's chairmanship of the G20, a rotating position, just as the global securities markets buckled under an international credit crisis and the world economy headed into what threatens to be a prolonged recession.

Brazil's benchmark equity index, the Bovespa, has lost roughly 44% since the beginning of the year, largely because of the index's heavy weighting from commodity-related stocks, such as oil giant Petroleo Brasiliero

Risk appetite for emerging market assets has waned in part due to the swift drop in commodity prices, which had supported fast growth in resource-rich countries like Brazil. Prices of metals and energy have tumbled since the summer as expectations of a global recession mounted, and the U.S. dollar gained against its rivals.

When the credit market crisis began to accelerate, Brazilian President Luiz Inacio Lula da Silva frequently voiced confidence that its economy would be shielded from the credit-market crisis that kicked off in the U.S. and Europe, noting that Brazil had foreign reserves of more than $200 billion.

But stresses began to show up in Brazil's financial system in the past few months, and the central bank and the finance ministry issued a number of measures to stave off the effects of the credit crisis.

The government spent $23 billion to defend the slide of its currency, the real, against the U.S. last month. It pulled back capital requirements on banks have been pulled back, scrapped a tax on foreign investments, and granted government-run banks authorization to purchase stakes in other financial institutions. Brazil also gave the auto industry a credit extension of 4 billion reals after automobile sales fell in October, the first decline in two years.

Cooling GDP, halted projects

Despite these efforts, concerns are growing about the impact the credit crunch is having on Lula's Growth Acceleration Plan. He launched the five-year, $250 billion program last year to improve the country's infrastructure and keep gross domestic product growth at about 5% a year.

Brazil recently reduced its 2009 gross domestic output forecast for growth of 3.7% to 3.8%, from its previous estimate of about 4.5%.

Plus, investors have been unsettled by some recent events, including the cancellation of nearly $2 billion port project in Sao Paulo by LLX Logistica, a firm privately run by Brazilian billionaire Eike Batista, and the delay of an auction by the government for the construction of a high-tension power line from the Amazon basin to Sao Paulo.

"The news flow has been negative in terms of Brazil's ability to fund some of the plans, and that perception needs to be reversed," Riedel said.

Analysts say a fiscal stimulus won't do much good without help from the central bank, however.

It recently left its key interest rate on hold at 13.75%.

"If they do not relax monetary conditions in the coming months, the effectiveness of any stimulus will be reduced," Coutino of Moody's Economy.com said.