WRAP: Latin American Mkts Take Global Turmoil On The Chin
Dow Jones Newswires
NEW YORK -- Latin American markets completed the circle of global equity
losses Tuesday that started in Asia and spread through Europe before moving
onto the U.S.
From Mexico to Argentina, analysts said the forces hurting markets were
familiar ones: Japan's anemic currency and economy; fears of more currency
devaluations in Asia, including the Chinese yuan; the fragile financial situation in
Russia; and falling commodity prices, especially oil. Add to that a 200-plus
drop by the Dow Jones Industrial Average, and Latin American markets didn't
stand much of a chance.
Analysts say no one knows how any of these events will play out, and what
their longer-term impact on the global economy will be. That uncertainty sent
Mexico's IPC index down to close 2.8% lower while Brazil's Bovespa index
fell 4.1% and Argentina's Merval index dropped 4.4%.
But they say that despite plunging stock prices Tuesday, Latin America as a
whole - with the noticeable exception of Venezuela - is in better shape than six
months ago to absorb shocks originated from some other corner of the globe.
Regional giant Brazil - which came closer than any other Latin American
country to an Asia-induced currency devaluation - pulled off a highly successful
privatization of telecommunications giant Telecomunicacoes Brasileiras SA.
And President Fernando Henrique Cardoso is looking more and more likely to
win his second term in October elections with relative ease.
Paine Webber's senior sovereign analyst, Siobhan Manning, said that although
the sell-off was reminiscent of the one that started in late October, so far there
was little talk of crumbling Latin American economies.
"It seems that the crisis of confidence contagion hasn't hit Latin America full
blown," Manning said.
"At this point, I'm not pessimistic about Brazil," said Antonio Costa, director of
Oryx Asset Management in Sao Paulo. "My worries are about other Latin
American economies, like Chile, Mexico and Venezuela, because of how they
are affected by commodities markets."
Still, observers believed the Brazilian Central Bank sold between $150 million
and $200 million Tuesday to contain volatility in the spot and futures currency
markets and to bring the closing rate in line with the previous session's close of
1.1686 reals to the dollar.
In Brasilia, a Central Bank spokesman denied the monetary authority had
intervened, although traders said the contrary.
The Mexican peso, meanwhile, closed at a record low of 9.120 pesos per
dollar despite the central bank's moves Monday to tighten liquidity in the
money market and general consensus the government has taken the right fiscal
measures in recent months to compensate for lost oil revenue.
The stock market's IPC index had slumped more than 5.5% Tuesday before
recovering late in the day to close 2.8% lower at 3628.45 points.
In addition to low oil prices, investors are worried about whether Mexican
exports to the U.S. - by far its largest trading partner - will maintain a
competitive edge over Asian products if the yen and other Asian currencies
continue to drop.
"Cheaper Asian imports hitting the U.S. market could hurt Mexican exports,"
said Cesar Rafael Castro, head of economic analysis at Capem Oxford
Economic Forecasting in Mexico City.
The Chilean peso also came under pressure Tuesday, closing at 471.80 pesos
to the dollar from 470.00 on Monday. The stock exchange's IPSA index shed
3.1% to 82.42.
The global turmoil Tuesday aggravated Chilean markets already under
pressure from weak export prices on such goods as copper. The Central Bank
has repeatedly this year put the crunch on liquidity, forcing the interbank
lending rate far above its 8.5% target.
Chile is particularly vulnerable to problems in Asia because it has, for the last
few years, been sending about one-third of its exports to the region, notes Jose
Manual Silva, research head at Santiago brokerage Larrain Vial. Japan and
South Korea consistently rank among the five top importers of Chilean
products.
Argentina's interest rates haven't been effected by the Asian trouble - in large
part thanks to financial sector reforms instituted after the Mexican peso crisis
of 1995 - but some analysts say they might if problems continue.
"Without a doubt, the situation is better (than in 1995). But a continued
worsening of the situation in Russia and in Asia would clearly have an impact.
We could see higher interest rates, which would have an impact on economic
growth," said Raul Buonuome, chief economist at Deutsche Morgan Grenfell in
Buenos Aires.
And the sluggish commodities prices are a worry for Argentina. The Buenos
Aires Stock Exchange's Merval index finished Tuesday 4.4% lower at 489.66,
after plunging 7% early in the session.
Without a doubt, Latin America's biggest trouble spot is Venezuela, which is
facing political instability and a major budget shortfall because of plunging oil
prices. After a $500-million, 20-year bond issue in July, the government
expects to raise another $1.4 billion through international debt issues, probably
in September.
"The crisis is forcing Venezuela to go into the debt market at a very bad time,"
said Ricardo Penfold, chief analyst with Santander Investment in Caracas.
In addition, the country's financial markets are suffering from uncertainty over
who will win Dec. 6 elections.
"The bolivar has problems of its own," noted Penfold. Santander expects the
bolivar to end the year at 630 to the dollar, compared to Tuesday's close of
568.50 bolivars. The general stock index ended 4.6% lower at 3989.07.
Reinaldo Santana, equity analyst with Credit Lyonaise in Caracas, added that
cheaper foreign imports from Asia were damaging the fortunes of some
Venezuelan companies, notably textile producer Sudamtex, which recently
announced major staff cutbacks, and steel producer Sivensa. Paper company
Venepal closed two lines of production due to foreign competition.
Smaller Latin American markets were dragged down by the sell-off - and
because of domestic factors. Lima's general index skidded 3.9% to 1548.22
points. Colombia's IBB index slipped 0.5% to 1071.36.
-By Michelle Wallin and Carol Remond in New York, Mary Milliken in Sao Paulo,
Monica Gutschi in Mexico City, Camilla Gallagher in Buenos Aires, Daniel Flynn
in Caracas and Felipe Ossa in Santiago.
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