LA Times. All Eyes Are Now on Brazil
latimes.com
Saturday, August 22, 1998
Latin America: As region's largest economy, it is seen as last,
shaky prop against crisis in Southern Hemisphere. But chaotic
day on nation's stock market raises concern.
By CHRIS KRAUL, Times Staff Writer
Stocks and currencies plunged erratically across
Latin America on Friday as analysts fretted over
Brazil, where the battle to defend its currency is seen as
a crucial test in keeping the region from descending into
a full-blown crisis.
Brazilian stocks suffered a vertiginous 10% decline,
before recovering most of the loss, as fears spread that
the continent's largest economy might be forced to
devalue its currency, the real, in the face of investor
disenchantment with emerging markets overall.
Trading in the Sao Paulo exchange was halted after
the morning's free fall, which was fueled by the
deteriorating economic condition of neighboring
Venezuela, disclosures that up to $5 billion in capital has
fled Brazil in recent weeks, and speculation that interest
rates are headed up.
Brazil's chaotic market, which ended the day down
2.8%, was hardly unique. Shaken by the U.S. bombings
of terrorist sites in Afghanistan and Sudan and the
continuing fallout from Russia's devaluation and debt
default, most Latin America markets went south. Stocks
in Venezuela, where a devaluation may be imminent,
lost 8.4% on Friday. Argentina's Merval index lost
7.8%; Chile's IPSA was down 4.3%.
There were also fresh concerns about Mexico as the
Bolsa stock index fell 2.45% and the peso sank to a
historic low of 9.74 per dollar on the 48-hour spot
market, down from its open of 9.55.
There were also reports that Mexico's government
might raise interest rates to defend its currency, a move
that would probably put the brakes on Mexico's strong
economic growth of recent months.
But Brazil's condition came under special scrutiny
because of its size, importance in the Mercosur trading
block and its status as the world's largest destination of
foreign investment after China.
A devaluation would effectively reverse Brazil's
four-year campaign to stabilize its economy after
decades of mismanagement and hyperinflation.
While economists continued to laud the country's
improved economic fundamentals, they warned that
Brazil's high trade and budgetary deficits are raising
fresh doubts that Brazil's real could withstand further
speculative assaults. That's because of the rising cost of
the debt it is taking on to finance those deficits.
"High deficits force governments to go out and
borrow money. And because Russia has defaulted on
some of its foreign debt, emerging nations must now pay
more for those loans, a cost that only adds to the red
ink," said Amaury de Souza, a political scientist at
Techne in Rio de Janeiro.
And when emerging-market countries can't secure
affordable loans to finance their deficits," it creates a
spiral. . . . The situation gets worse. . . . The market
starts to wonder where the money is going to come
from," said Michael Henry, a Latin American economist
at ING Barings in New York.
If Brazil were forced to devalue, Argentina--despite
new lines of defense against currency assaults--might
have to follow suit because the two economies are
closely intertwined, economists fret. One-third of
Argentina's exports go to Brazil, its largest trading
partner.
Salomon() Smith Barney equity
strategist Jim Barrineau said that so far the Latin
American market problems, aside from Venezuela, are
basically psychological and a residue of Asian and
Russian turmoil. But there comes a time when market
problems caused by lack of confidence will begin to
impinge on the fundamental economies if instability
persists.
Brazil and Argentina could feel the effects from
market gyrations if fears of a devaluation cause a panic
run on banks by depositors. To stop runs in the past,
Brazil and Mexico have sharply raised interest rates to
discourage speculators and attract foreign capital. But
those higher rates carry a cost of higher inflation and
tighter credit.
"The big risk is that these emerging markets will
have to again tighten their belts both fiscally and
monetarily to restore confidence," Barrineau said.
Just the threat of a devaluation typically causes a
slowdown in foreign investment, said Rafael de la
Fuente of Paribas. "If you are a U.S. oil company
investing in Venezuela, you're waiting to buy trucks or
other capital equipment there because with a devaluation
next week or next month, your dollars could buy more,"
de la Fuente said.
The consensus on Brazil among analysts such as
Josephine Jimenez, senior portfolio manager of
Montgomery Emerging Markets Fund in San Francisco,
is still positive overall, however.
"I remain unshaken in my faith in Brazil. Market
sentiment is one thing, but on fundamental grounds,
Brazil is looking good in terms of reforms and growth
outlook," Jimenez said. She added that the country's
$70 billion in foreign reserves gives it ample protection
against a speculative currency attack.
Sidney Weintraub, political economist at the Center
for Strategic and International Studies in Washington,
said that "leaving aside Venezuela, the skittishness
investors feel these days reflects less what's happening
in Latin America than what's happening in other parts of
the world."
"That Russia defaulted on its debt is a problem not
because these countries trade with Russia but because
investors are wondering whether other emerging-market
countries will pay their debts. This could cause people to
hold off on their investments in Latin America until the
picture becomes clearer," Weintraub said.
* ECONOMIC CONCERNS GROW
U.S. markets fall broadly on deep global sell-offs. A1
Russia's government is under fire for the financial
crisis
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