A Newsweek correspondent years ago once described Brazil as having a rather “willy nilly” character. The nation’s status at any particular moment may be precisely what is willed by elected officials, the financial community and the people at large, or in fact could be the opposite. In a country as large, as politically divergent and as economically underdeveloped as Brazil, practically anything is possible.

Economic performance over the past two years is a case in point. Political infighting-certainly not uncommon-causes Congress to stall on implementing economic reforms needed to boost the economy after the Real Plan is implemented. Crises hit the emerging markets, inflationary pressures build within the country, and the real finally must be allowed to float. Would-be leaders blame falling wages and rising unemployment on President Fernando Henrique Cardoso. Opinion polls show the president’s popularity beginning to plummet-to the point that this man, once seen as a hero, becomes more disfavored than was ex-President Fernando Collor de Mello, who fled the country on corruption charges. Suddenly investors have to reconsider Brazil, and the IMF has to wonder whether Cardoso can maintain the fiscal austerity, on which the relief package depends.

Yet behind these dark clouds that political disaccord often generates, the sun is shining. Behind the unemployment and the falling wages and rising discontent with the president is an economic team committed to preserving key fundamentals. As Arminio Fraga, head of Brazil’s central bank, told LatinFinance in this issue, “We still have to perform in a steady fashion before for a few years before we can declare a victory.” There is a general belief among many key public officials and private citizens that the time has come to bite the bullet. In fact, the strength of the financial sector has prevented the country from suffering more. Thanks in part to the banks’ actions and to the stability provided by the central bank following devaluation, the recession in Brazil is not as deep as it could have been.

Instead of collapsing after the devaluation of the real, some of the biggest banks in the country actually posted quite impressive first-quarter results that in some cases exceeded their earnings for all of 1998. Banco Itaú, for example, posted a net profit for the quarter of $402.4 million, compared to 1998’s profit of $156.1 million. Brazilian banks did so well generally because in post-devaluation Brazil, unlike in post-devaluation Mexico or post-devaluation Thailand, banks had fewer bad loans on their books and they were much better capitalized. In the mid-1990s, Brazilian bankers sensing danger in the climate of high interest rates and low inflation rates began shifting their asset portfolios out of private loans and into government securities. At the end of 1997, when bank loans to the private sector exceeded 100% of GDP in Thailand, for example, it was exceeded by only 24% in Brazil. In the US, records show it was exceeded by 65%.

Furthermore, there is very little short-term international debt left now in Brazil. Authorities are working hard to eliminate the dependence on any short-term financing and envisage the day when the country will be completely financed with long-term borrowing and foreign direct investment. Another good sign is that maturities on the local debt market are increasing. Still worries abound. A 1999 surplus of 2.7% GDP is expected now, or about a half percentage point under the target agreed upon between government officials and the IMF. The real by mid-August had lost more than 50%, against an accumulated inflation rate of 4.8%.

Going forward, so long as Congress does not approve further privatizations and the fiscal reforms needed to generate full economic growth, the government has no choice but to raise taxes in the coming year, despite the fact that taxes are already much higher in Brazil than anywhere else in Latin America. That will further erode the president’s popularity. And if officials give in to the mounting populist pressure to increase government spending, the economy will slow even more.

The government needs approval of the reforms to stimulate growth, but it needs growth to encourage approval of the reforms.