The old joke about Brazil was that it was the country of the future-and always would be.
But with the 20th century drawing to a close, Brazil is beginning to look like the future has finally arrived.
Foreign investment continues to pour in, economic and administrative reform are moving ahead, the stock market has risen over 50% since last year, and inflation has been cut, bringing a degree of economic stability not experienced in decades.
Bankers and analysts like what they see.
"Historically there has been more volatility and less stability in Brazil, but the fact remains that Brazil has the largest and most diverse economy in Latin America," said Hugh M. Durden, president of Wachovia Corp.'s corporate banking division.
The country has a gross domestic product of close to $800 billion and a population of over 160 million people. Sao Paolo, the energetic business capital, alone has 22 million people, making it the world's third-biggest city, after Tokyo and Mexico City.
Foreign exchange reserves, at $58 billion, are at their highest level in years, and the exchange rate of the Brazilian real has remained stable for several years. In addition, a change of Brazilian law in January allowing incumbent President Fernando Henrique Cardoso, an ardent supporter of economic and administrative reform, to run for a second term has enhanced prospects for stability.
That's not to say that problems don't remain. The country's currency is still overvalued, making Sao Paolo one of the most expensive cities in the world. Trade and budget deficits are rising, and corruption remains endemic.
Consumption, spurred by low inflation, is surging. Interest rates remain high, and the banking sector-both public and private-has yet to complete the transition to a low-inflation environment.
This, analysts and bankers say, means Brazil still needs careful economic and financial management.
"The government will continue to walk a tightrope between recession and overheating," said Manuel Lasaga, president of Strategic Information Analysis Inc., a Miami-based consulting firm specializing in Latin American economies.
Still, the generally bullish outlook, coupled with the enormous potential for economic growth, have attracted the increasing attention of U.S. corporations and the banks that serve them.
U.S. banks' renewed interest in Brazil is perhaps one of the more dramatic signs of confidence.
Less than four years ago, banks and Brazil were still haggling over final terms of a $52 billion debt restructuring after Brazil defaulted on its payments.
Today, bankers in Miami, a major center for trade and finance with Latin America, estimate that of some $20 billion in short-term trade-related credits the city's banks extend, as much as 40% is now going to Brazil.
Overall lending by U.S. banks to Brazil is also rising. According to the Basel-based Bank for International Settlements, U.S. banks' holdings of cross-border loans to Brazil hit $16 billion last June, up from $14.5 billion at yearend 1995 and $11.4 billion at yearend 1994. And that doesn't include loans booked locally.
Bank of Boston, for example, has more than $4 billion of loan assets in Brazil, while Citicorp's assets have risen by nearly 50% in Brazil, to $6.2 billion.
Both Citicorp and Bank of Boston Corp. are expanding their Brazilian operations. Bank of Boston has looked at buying several banks in Brazil while adding 10 branches its existing 26 in the country. Citicorp, which posted a $105 million net profit on Brazilian operations last year after $55 million in 1995, is also moving to expand consumer and corporate banking and advisory mandates on upcoming government privatizations.
In contrast, Chase Manhattan Corp., J.P. Morgan & Co., and Bankers Trust New York Corp. are targeting capital markets and fund management operations, while Wachovia Corp., the latest entrant to the market, has bought a Brazilian bank as part of a plan to develop trade finance and service U.S. multinational customers.
Meanwhile, Brazilian banks are in the final stages of adjusting from hyperinflation to a low-inflation economy.
"The Brazilian banking system has had to adjust to the most incredible series of upheavals imaginable," observed Brent B. Erensel, a banking analyst at UBS Securities in New York. "Success in Brazilian banking has required amazing agility, strong capital, and liquidity."
By and large, the big privately owned banks in Brazil such as Banco Bradesco and Banco Itau have come through the transition successfully. They've slapped fees on previously free services, boosted high-margin consumer and corporate lending, charged up to 8% a month on credit card balances, automated operations, slashed staff, and stepped up equity investments. Bradesco, for example, has cut its staff to 47,000 from 160,000 10 years ago.
"Asset quality has improved, there's a lot more liquidity in the system, and compared to 1995 and 1996, 1997 should be a relatively calm year," predicted Peter Shaw, Latin American bank analyst at Thomson BankWatch Inc., an American Banker affiliate.
But that forecast, he warned, "goes out the window if growth takes a spurt and the government has to tighten monetary policy."
In an assessment released earlier this month, Moody's Investors Service estimated that after a large rise in bad loans in 1995 and 1996, "the credit strength of Brazil's big banks is showing signs of stabilizing."
The agency predicted that Brazilian banks will continue to strengthen through "greater cost efficiencies, stronger credit controls, and increased foreign investment," adding that strong government support for banks in trouble has reduced "the risk of systemic problems."
Still, the adjustment has not come without problems. Several large state-owned banks, like Banco do Brasil, racked up enormous losses over 1995 and 1996 and had to be bailed out by the government. Other banks, like Banco Economico and Banco Nacional, went under and were taken over.
More of the less profitable, poorly managed banks are likely to be taken over by bigger and better-managed institutions, bankers predicted. In Brazil as elsewhere, they added, only the biggest and the strongest are going to survive.
"There are still too many banks in Brazil," observed Albino Winkelmann, manager for money markets trading at Bradesco in New York. "We believe that within a year or two, the number of banks in Brazil will go from 250 to 120 or 150-maximum."
