Emerging market tag overshadows LatAm fundamentals
Reuters, Wednesday, August 12, 1998 at 15:30
By Carlos A. DeJuana
BUENOS AIRES, Aug 12 (Reuters) - It's all in the name, they
say, and for Latin America's stock markets the "emerging
markets" tag has lately been doing more harm than good.
In the last two weeks, Latin America's major stock markets
have dropped over 16 percent on average as a jittery Wall
Street has reeled from the latest fallout of the Asian crisis
and fund managers have pulled out of anything bearing a scent
of risk.
But weren't Latin America's economies doing well? Reforming
their banks? Making their accounts transparent? Slashing
budgets and maintaining fiscal discipline, all to meet the
scrutinizing criteria of U.S. investors, credit agencies and
the International Monetary Fund?
Yes, said Daniel Tassan-Din, head of analysis at Deutsche
Bank Securities in Argentina, but Mexico, Argentina and Brazil,
the major Latin American economies, still carry the "emerging
markets" tag.
"It doesn't matter how strong your banking system is or
reforms are, you are still lumped as one type of investment.
That's how funds work," he said.
"Fund managers are to a great extent selling because
they're forced to, because investors are pulling money out.
That creates a rolling ball where prices go down, other people
panic and you get these big corrections," said James Barrineau,
chief Latin American strategist for Salomon Smith Barney.
The most recent culprit is Japan, which has been unable to
convince investors that it can jump-start its sinking economy,
prompting the market to knock the yen to eight-year lows.
As that occurs, investors are worried China will be forced
to devalue its currency to remain competitive in the region,
which could trigger a whole new slew of currency devaluations
and economic chaos.
For Latin America, the fear is that the new devaluations
could put pressure on countries like Brazil or Argentina.
A devaluation by Brazil, whose bulging fiscal deficit and
tightly regulated currency make it a target for speculators,
would most likely spur a regional crisis much worse than the
1994 "tequila" crisis.
Should Hong Kong be forced to devalue, the markets might go
after Argentina, which has a similar fixed-peg currency system.
But analysts say the fear is mostly psychological, not
economic.
"If China devalues its currency, what is the impact on the
economy in Brazil? Very small or zero," Tassan-Din said, adding
that the same went for Argentina. "But there would be a big
psychological impact. Unfortunately, that is what the market
reflects."
Either way, most analysts do not see a devaluation by Hong
Kong or especially China, which has $140 billion in its foreign
reserves to defend the yuan, its currency.
"It would do them more harm than good to devalue.
Politically, they're setting themselves up to be engine of
growth for Asia. This is more psychological than economic,"
Barrineau said.
Brazil has also said it will not devalue. It holds a
foreign reserve war chest of its own worth around $70 billion
and has already successfully defended its currency from the
markets when it came under pressure in October.
The key is to sit tight, the analysts said.
"If Latin Americans don't panic and they can weather these
crisis, their economies will be stronger than before. At one
point, money will flow back in," Deutsche Bank's Tassan-Din
said.
Barrineau concurs: "Once the smoke clears, because of these
reforms, Latin America is going be a much stronger market."
buenosaires.newsroom@reuters.com))
Copyright 1998, Reuters News Service |
