Brazil: The Real Plan (a)

This case describes Brazil's political and economic evolution from the end of WWII to October 1998, focusing on the policies and effects of the Real Plan, an economic stabilization plan implemented between 1994 and 1998. Contagion effects of the Russian Crisis in August 1998 led to massive capital outflows from Brazil and put pressure on foreign exchange reserves. Brazil needs to decide what actions to take with respect to its system of fixed exchange rates. See also the B case (UVA-BP-0430) and C case (UVA-BP-0431). Excerpt UVA-BP-0429 BRAZIL: THE REAL PLAN (A) In May 1993, Brazil's President Itamar Franco appointed sociologist Fernando Henrique Cardoso to the position of finance minister of Brazil. Cardoso, who was the minister of foreign affairs at that time, was about to face a great challenge. He would be the fourth finance minister for Brazil in less than eight months. In early 1995, Cardoso took office as the president of Brazil, after defeating the Labor Party candidate, metalworker Lula (Luis Ignacio da Silva) in the elections. That was a clear signal that the Brazilian people trusted Cardoso to finally put the country on the right track to success. Cardoso was reelected in 1998, defeating da Silva again, mainly because of the objectives he achieved. Brazil was finally able to control inflation, the currency was stable, the country proved that its economy was manageable by surviving the Mexican Crisis in 1995 and the Asian Crisis in 1997, and above all, the country was back on the radar of international investors (Exhibit 1). In more than 30 years, Cardoso was the first democratically elected president to complete his term since Juscelino Kubsticheck (1956–61). In five years, the country experienced growth and stability and it seemed that Brazil would take its place among the developed capitalist countries. Cardoso, however, was still struggling to complete the reforms. If Brazil were not able to approve and implement significant fiscal reforms, all the positive things that had been accomplished would be jeopardized. Exhibit 2 shows budget deficit data and Exhibit 3 illustrates foreign debt. In terms of foreign indebtedness, while Brazil was able to reduce short-term debt, net foreign debt expanded by 32.6% in 1998 (growth of net foreign debt was almost double that of total foreign debt due to the decline in the international reserve position). To make matters worse, the Russian Crisis exploded in August of 1998, and investors decided to be more conservative regarding developing countries and to take a deeper look into the economies in which they were investing. What would they see in Brazil? What challenges would Cardoso face in his second term? . . .