Brazil's Break With Iraq Threatens Recovery Plan

A PROLONGED shut-off of Iraqi oil supplies could seriously hurt Brazil's attempts to stabilize its economy, analysts say. ``We just went through five years of economic nonpolicy,'' says Clovis Faro, an economics professor at Rio de Janeiro's Getulio Vargas Foundation. ``We are now beginning to clean our house, with a different kind of adjustment process. Will we be able to survive a new crisis?''

Ironically, Brazilians helped arm the same invaders who could wreak havoc in their economy. Iraq uses Brazilian-made rockets, rocket launchers, troop transports, tanks, planes, trucks, jeeps, and rapid-attack vehicles. Brazil always defended its weapons sales by saying that the arms were not made for offensive use. But Foreign Minister Francisco Rezek told the Gazeta Mercantil business newspaper last week that Brazil will now select customers ``with caution,'' choosing only those with defensive aims.

Increasing oil prices would, over time, result in higher prices throughout the economy, thereby damaging President Fernando Collor de Mello's efforts to bring down inflation, just as they are beginning to pay off. Inflation began to stabilize at between 11 percent and 13 percent a month in June and July, and shows signs of dropping off this month.

Bigger petroleum bills would especially affect attempts to curb inflationary government spending, since the state is a major shareholder in much of the petrochemicals industry.

Mr. Collor hopes to stabilize the economy in the next six months, bringing Brazil back into international financial and commercial markets. Key to success is increased trade with the industrialized world. If the oil crisis pushes the United States into a recession - cutting into exports to the US - Brazil will have to depend more on its own resources. ``We will have a recession here and not have the escape valve of foreign markets,'' Mr. Faro says.

A recession has already begun to set in, but could get worse if the oil crisis forces the government to tighten its grip on the money supply, economists say. Nevertheless, government officials so far believe economic policy will stay on the present course.

Brazil imports on average about 40 percent of the oil it consumes. Almost half of total imports were from Iraq, with which it had close trade ties. Kuwait shipped about 6 percent of Brazilian oil imports. Brazil is increasing its imports from Iran, and is looking to its other suppliers, including Saudi Arabia, to make up the loss. ``We're not frantic, so we're shopping,'' says an official at Petrobr'as, the state-owned petroleum monopoly.

With an oil-import bill of about $3.8 billion last year, government officials say they may have to tack an unexpected $1 billion onto this year's account, if prices stay high. The cost of oil imports was $1.7 billion in the first half of the year.

For the next two months, Brazil has enough oil. The government may step up domestic production from about 650,00 barrels a day. Energy conservation, not widely used, may be adopted.

Iraq has been a disappointing trade partner all around. According to O Estado de Sao Paulo newspaper, Iraq owes about $190 million to two Brazilian arms makers, and has not made good on agreed-upon payment plans. The Brazilian companies, Avibr'as and Engesa, are bankrupt.

Brazil also exports chicken and beef, steel, aluminum and iron products, paper, tobacco, and refrigerator compressors to Iraq. During the first half of this year, sales of such goods came to more than $83.5 million. Brazilian companies are looking for new customers, and some have already diverted shipments.

Ironically, this oil price increase occurs just as Brazil's decade-old program to substitute sugar cane alcohol for gasoline fuel is losing public support. Set up to free Brazilian motorists from imported petroleum, the subsidized Pro'alcool program is now viewed as costing too much. Intermittent alcohol shortages have sent Brazilians scurrying to trade in alcohol-fueled cars for gas-powered ones.

Many of Brazil's problems date back to poor handling of previous petroleum crises. In 1973, the government decided to finance its oil bill, instead of cutting back. This started a snowball that became today's $115 billion foreign debt. At the time, Brazil imported 90 percent of its oil needs.

Collor's predecessor, Jos'e Sarney, tried to restrain inflation partly by keeping fuel prices low, which hurt investment. ``Petrobr'as didn't invest in the last five years in new petroleum production, and now we will miss this,'' Faro says. ``We are running the risk of being caught off balance.''