In 2002 the Brazilian economy came up against serious difficulties that prompted international financial markets to raise its country risk and triggered a drastic decline in capital inflows, which, in turn, led to a significant devaluation of the real and an upsurge in inflation. These difficulties arose from uncertainty as to what economic policy would be adopted by the administration to be elected in October and from the country’s high levels of external and public borrowing, as well as from the reduced availability of international capital as a result of the slump in activity in the developed countries and a loss of confidence in emerging markets following Argentina’s declaration of default in late 2001. Economic policy was accordingly geared to regaining the confidence of financial markets and keeping inflation in check, which forced the authorities to apply very tight monetary and fiscal measures. These actions, together with the end of the uncertainty surrounding the election, made it possible to stem the speculative attack, especially when the new government took office in 2003. However, this tight policy dampened the level of activity, which again posted modest growth (1.4%); the rate for 2003 is expected to approximate the levels of the past two years.

Related Subject(s): Economic and Social Development
Countries: Brazil
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