':"'),] rrrr lr (f'\PV (f f~.(U No. E 38/49 .·t/i~. I CONFIDE~TIAL ... ,,.- r. ,. ' This report is restricted to those members of 66884 the staff to whosework it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT EXTERNAL CREDIT OF BRAZIL May 6, 1949 Economic Department Prepared by Dr. Harold Larsen ESSENTIAL STATISTIC,;/ ~: 3.29 million square miles Population (1948): 48 million Currency: ~: Cruzeiro ;parity: 18.50 cruzeiros per dollar (5.4o5 cer:ts/ cruze~ro) National Income (1948): US$ 6.7- 7o0 billion Income per head: US$ 140 - 146 Trade3 ,Iworts 1948: US$ 11,34 million Exports 1948: US$ 1173 million External Debt: Outstanding, December 1948: US$ 739 mUlion Undisbursed Exi.mb~: US$ 35 million Undisbursed IBRD: US$ 75 million Peak Service (on U§$ 849): US$ 58.4 million (1951) Net Gold and Exchange Reserves: ;Q;lcember 1938: US$ 50.5 million December 1946: US$ 784 million December 1947:..., 1 US$ 758 million I:ecember 1§48:Zt US$ 655 million Federal Finance: 1947: Revenues: US$ 750 million; SUrplust US$ 25 million 1948 ~Jan-Oct): Revenues: US$ 670 million; ,Sufelus: US$ 6b million Internal Funded Debt of ?ederru. Government (1947): US$ 542 million Money Supply (1937 = 100) December 1~6~ 418 ,December 1~7: 462 pctober 19 : 473 Cost of Living;: (1937 =r 100) ~: 296 351 ~:June: 3969 1948, December: 38 1J Cruzeiros converted at 18.50 per dollar, §} Net of known liabilities except US$ 6o million gold pledged against (N. Y.F.R.B.) Stabilization Loan; and backlog upon exchange remittances. Studies made in the Economic Department yield the following conclusions: CONCLUSIONS 1. Many changes are probable in the Brazilian balance of payments and in Government economic policies. E~ort receipts will probably fall; European import sources are re-opening; the Salte Plan is being dis- cussed in the Brazilian Senate; the President of Brazil will visit Washington in mid-lviay, where he will pres1.lll12tbly discuss the findings of the Abbink: Commission with the United States Government, and seek finan- cial and perhaps technical aid. 2. Until these matters are clarified, heavy additional lending cannot be recommended. In the meantime, relatively small loans (to a total level of around US$ 50 million) repayable in United States dollars could be undertaken tr..is year, particularly if their service begins in 1954 or later. 3• US$ 50 million is suggested because: (l) Annual service would be about US$ 4 million upon a 20-year loan of this ~unt. (2) By 1954 total annual external service on all loans now com- mitted to Brazil will fall. US$ 6.5 million from the peak (1951) level of US$ 58.4 million (paragraph 23). -1- (3) Peak (1951) debt service is not an unduly high proportion of recent e~orts (paragraph 24). (4) b'ven if dollar export earnings diminish somewhat, dollar availabilities should not be impaired, and might even improve, if Brazil is increasingly able to resort to European import sources {paragraph 14). 4. The long-run future balance of payments will depend largely upon the effective execution of domestic policies. Past Brazilian his- tory in this field does not permit over-sanguine expectations. Much may now depend upon the scale and direction of United States advice and fi- nancial and technical assistance to Brazil, for which the ground work may have been provided by the joint Brazilian-United States (J.'bbink) C'.om- mission Report. If positive United States assistance emerges, IBRD loans might become complementary to United States-Brazilian cooperation for development. 5. IBRD may wish to press for satisfactory steps to decrease the backlog of deferred payments for imports, thus cooperating with IlviF to remove a cause singled out by the Abbink Commission as damaging Brazilian external credit in the eyes of the private investor, To this end, adop- tion of foreign exchange budgeting may be necessary. (Paragraph 19.) SUMMARY OF PRESENT POSITIOl\J' Balance of Payments 6. Brazill s balance of payments prospects depend upon: (a) Export values of coffee, raw cotton and cacao (together 62% of total exports in 1948), and her ability to develop other exports now individually minor. (b) Increase of domestic production of some imported essentials. notably wheat and fuels. (c) Capital inflows, private and portfolio. (d) Adaptation to changing European circumstances touching (1) in- convertibility, (2) ~1lropean export abilities, (3) longer-run development of African supplies of competitive exports. some as European dollar earners and some as non-dollar sources for Europe. (e) Execution of domestic developm,ent programs (currently the Salte Plan) predicated upon high equipment imports, and likely also to raise consumer money incomes ahead of increased domestic consumer good output. Exports 7. Total exports in 1948 were US$ 1,173 million. a value only 2.4% greater than 1947, compared with a 16 .. 2% increase between 194 7 and 1946. Coffee exports were 4lo5% of total 191-tB exports by value. raw cotton 15.6% end coCQa beans 5%. In 1939 coffee exports were 4cr;b of the total value of exports, and raw cotton 20%. Between 1939 and 1948 some other exports, stiJ~ individually minor, increased markedly in vo~~e, notably rice, sugar) pine wood and cotton piece goods. Fore:i.gr.l exchange receipts from present export leaders are likely to decline rather than -4- increase in the near future. 8. (a) Coffee exports were US$ 499 million in 1948, compared with an annual average of US$ 138 million for 1935-39. In 1948 the United States took 67% of coffee exports by volume (1935-39 annual average 55%) and 72% by value, while Europe took 23% by volume and 20Cfo by value. Coffee exports to the United States constituted 65% of all Brazilian exports to the United States in J,948~ (b) Maintenance or increase of production depends upon. change of present growing methods, as suitable new land permitting con- tinuance of migratory cultivation is increa.singly scarce~ In the shorter run, the Sao Paulo growing district is in d.:fficulties with insect pests., drought, and shortage of workers; the fourth official estimate is for a district crop in the l94s-49 season 20% below the 1947-48 outturn., (c) Prospects for volume of exports are for a fall-back from the near ell-time peak achieved in 1948 (17 .49 million bags; only higher year, 1931 1 17.85 million bags). Annual average volume of e~orts was l5ol0 million bags in 1935-39; 1946 exports were 15.51 million bags and 1947 exports, 14.83 mUlion bags. (d) There were no Gover~~ent systems of guaranteed or minimum prices, export subsidies, or marketing quotas in effect in 1948. (e) Prospects for Brazilian ~fee prices depend, for the better grades, upon United States consumer incomesQ In 1948 Brazil ~~p­ plied about 55% of all coffee imported into the United States. -5- compared with 53% in 1947 and the annual average, 1935-39, of 6o%. (f) New York duty paid :9rices for Santos green coffee fell 4.,9% between November 1948 and March 1949, and recovered a little in .April, The 12-month change ending April 1949 was a fall of 1.5;~. It is expected that a decrease of United States consumer demand would carry a somewhat smaller price fall for Braz.ilian coffee than for higher grade milds,. (g) Upon average export volumes 1946-48, one cent a pound varia- tion of price carries US$ 21 million annually, of which about $15 million is in United States dollars. 9. (a) Baw cotton exports were US$ 183 million in 1948, and US$ 166 million in 1947. Europe took 885b of raw cotton exports by volume and 87% by value in 1948~ The three leading purchasers (Britain, Spain and Italy) took 50% of all raw cotton exports in 1948. In 1947 the same three took 4l~o, and in 1946 55%, Europe as a whole taking 80% in 1947 and 79Jb in 1946. (b) Prospects for volume of exports are for a heaVY decrease this year to about half last year's level, ·which drew heavily upon stocks. Longer-run prospects depend upon production increasing more than domestic consumption, which appears very possible. (c) Brazilian raw cotton prices are likely to follo~l!l closely price movements of United States raw cotton, with 1nhich Brazil competes in European markets. -6- (d) United States raw cotton prices fell 17% from a high in May, 1948 to a low in October 1948, then recovered 5.8% to April, 1949. The 12-month change, April, 1948 to April, 1949, was a fall of 11.3%. United States cotton markets are at present in a confused position with no apparent emergent trend. 10. Recent price falls for cacao have been severe; the New York spot price fell 55% from 44a6 cents per pound in July, 1948 to 20.0 cents per pound in April, 1949. The l2..month.crcnre, enct.ing April~ 1949~ was a fall of 30%, but the April, 1949 Frice is still 74% above the average 1946 price of 11.5 cents, which in turn was well above the average 1939 price of 4.8 cents. Price falls since July, 19L~8 have been in.:.""luenced by a sizeable reduction of United States consumer demand for chocolate con- fections at a time when West African cacao supplies were u:1Usual]y large. It is not yet clear whether United States consumption will continue to decline, but 'rith the probability of smaller supplies of cacao coming forward, prices are expected to stabilize around current levelso 11. No presently known resource can reasonably be exr;ected to lead quickly to substantial new exports. There is disagreement among exr:erts regarding possible mineral exports, notably iron and manganese ores, but there is substantial opinion that such heavy investment would be required for their exploitation that export would probably be non-competitive. Imports 12. Total value of imports in 1948 was US$ 1,134 million, US$ 84 million less than 1947. In 1948 rm1 materials and fuels were 23.3% of -.7- all imports, foodstuffs 18.6%, and manufactures 57.9%. Some individual items, as percentages of total imports, were fuels and lubricants 11.5%, wheat and wheat flour 11.9%. machinery 27. 7ro, and passenger automobiles 4.91~>. 13. Import pressures are likely to be contirru.ous, even if some present imports are replaced by domestic production. Consequently, any substantial increase of foreign exchange reserves could result only from officiel controls upon imports., Direction of Trade 14. Before and since \7orld .W~ II the t'n1ted States has t~en 35% to 43% of Brazil t s exports. Before the War the United States supplied about 25% of Brazill s imports, compared with 61% in 1947 and 52% in 1948. Before the 1.7ar, Brazil customarily showed a small active trade balance with the United States; in 1947 there was a passive balance of US$ 311 million, which in 1948 was reduced to US$ 79.5 million. With the re- opening of Jlluropean impOrt sources, Brazil should be able to regain her pre-war trading position, and in that event should not be seriously ham- pered by persistence of European inconvertible currencies. On the other hand, maintenance of volume and prices of exports other than coffee to the United States may in a very long run become increasingly diffi- cult under competition from new African sources. -8- Terms of Trade 15. Prices of mein Brazilian exports are likely to fall further, but prices of imports are also likely to fall. Baw material and food- stuf:IS imports were 41.9% of all Brazilien imports in 1948, wheat alone being 11.9% of imports. Prices in these import groups are likely to fall at least as much as average Brazilian export prices, since no great fall of coffee prices (affecting 4Q1b of Brazilian exports) is expected. Price reductions upon imported manufactures (57 .91b of 1948 imports) vrill pro- bably be less than in the raw material and foodstuffs groups. On balance,. therefore, the prospect is for some deterioration of present Brazilian terms of international trade, ending the unusu.:'tlly favorable terms enjoyed in the war period. Devaluation 16. Devaluation of the cruzeiro is like],.y to follow any quick fall of Brazilian export prices, and might also occur if serious domes- tic inflation reappears. By itself, however, devaluation would not iiiipair external credit-worthiness, and might under appropriate circum- stances improve it by facilitating adjustment of domestic to external economic conditions. Exchange Reserves and Commitments 17. At December 31, 1948, gold and exchange holdings were - 9- equivalent to USt~ 655 million. Gold holdinGS ':-:ere US' .. 317 million, and convertible currencies us·; 68.3 ;~1illion, a total of us':; 385.3 million. Holdings of European cou;Jensation currencies vrere the equiv- alent of Us::~ 85.4 million, and of Argentinean, US_~ 27.4 million (equiv- alent). Blocked sterling amounted to US', 157.3 million (equivalant). 18. Gross u 2'o1d and convertible curre::1cies holdinr:s - (US"· 385 million) include the de facto note issue reserve (about us:'\ 275 million) and gold pledged to the United States Federal Eeserve Board (US$ 60 million at the end of 19h8). Thus the free nargin vras about US~ So million. If, upon eetablishment of a Central Bank, a gold reserve of 25% ae:ainst issued currency is prescribed (as is sa:Ld to be intended) hard reserves are at a mi.ntnm:1 level. 19. A backlog upon exchanc;e c omrhitments arose during 19h 7, and in !~larch, 19!_:9 was some ust,;: 117 nillion, or about 5 ·weel:s' im1Jorts at the 1948 rate. Probably because many individual i teL1S have been outstanding for very long periods, this backlog has aroused more con- cern than its absolute importance appears to warrant. The Abbink Commission represents it as a major factor impairing the investors' assessment of Brazilian external credit, and suggests a possible foreipn loan for funding purposes. The H\F, when granting Brazil a US~; 15 mil- lion drawing early in April (lo~; of quota) conditioned further drawings (to the annual limit of 25% of quota) unon satisfactory reduction of the exchange backlog. An TIIF Fission visited Brazil in Anril to assist in improving the administration of exchange controls, to ensure a l"lore orderly distribution of available exchange. Further steps, nrobably - 10- involving exchanr3e bu.dgetint; practices, &.re required if the ~roblem is to effectively dealt ':rith. 20. US~ 20 million of a US$ 80 million Federal Reserve Banl< stabilization loan (secured against gold) was paid off in 19)-i-8, and another US~; 20 miJlion in March, 19u9. The remaining us·". uO million be liquidated this ;}rear; repayment may, h011rever, be delayed the consent of the United States Treasury. 21. The Brazilian President reported to have sent a message to his Congress stating that war uccou.nts '.'ri th the Un~- ted had been settled, crith F<"' viJ) ., !""' ::> ' 11' ml_ . , 1.y 1.on ar::nua1. until 195h. This has not been included estimating foreign debt service (paragraph 23). Foreign Debt Service 22. The 9resently outstandine; foreign debt is estinated at us·: 739.4 million (321+.4 million US and 415 .o million equivalent almost wholly sterling), not including undisbursed Exim-Banl< commitment of US~ 35.1 million and IBRD of 75 million. The total is thus US~. .;;;~ '11' L' m1..~1.on. 23. The peak load of debt service on this US:'!: 8h9 ,.5 nillion estinated at us::t 58.!~ million 1951, falling progressively thereafter (us ' ; t:;1.9 _ mJ'.ll;on ;n 19C:!J., ancl .. ., .J.. .- - , ns.'\ u ·.:' 29 . •7 '11. nn. . _J_on 1.11 l96o) , "' • 24. This peak service represents al.lout l~. 7;; of current account balance of ;;aJilnent receipts in 19h7 (about 5>; of 19u7 and 19).;8 - 11- Peak debt service loads for some other countries, as '1er cent of their 1947 current account balance of ~ayrnent receir:>ts, are ChiJe 6.5%, Colorr.bia 3.8~ Uruguay 1.{.• 6.~ and EeJdco 7 .O%. Internal Finance 25. Inflation and cost of livinc: incre:otse slackened in 19h7 and during 19h8. '·far-tine balance of Daynents e~:~Ja:1sioE a.nd deficit Government finance both ceased, and the foruer is unlikely to recur. The outlook for inflation now