Latin America Is Buffeted, but Seems Stronger Than in '94
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September 1, 1998
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By JULIA PRESTON
EXICO CITY -- The demons of financial crisis are haunting
Latin America again, unleashed by tumult in Russia, Japan and
now the United States. Markets and currencies across the continent
are sinking as panicky investors retreat to the safe haven of U.S.
treasury bonds and dollars.
Most of the major Latin economies are far better fortified to withstand
the external battering than they were four years ago, when a
disastrous devaluation in Mexico engulfed several Latin American
economies into what economists, investors and politicians called the
tequila effect. Since then Mexico and Brazil have taken sober
measures to build foreign reserves and control inflation while
Argentina and Chile persevered in tough programs already in place.
Among the big players, only Venezuela failed to buckle down to
austerity and now is paying the price in a full-blown emergency, with
reserves dropping, short-term bank interest rates soaring to 120
percent and the stock market off 37 percent this month.
Since most of the underlying economies are solid, the market turmoil
might have a milder effect in Latin America than alarming appearances
at the moment augur, economists and analysts said. But they
cautioned that if markets outside the region continue to dive for long,
or if investors flee the emerging markets en masse without regard to
the strengths of individual countries, the outcome could be
devastating.
And if the U.S. market slide results in a sluggish U.S. economy, the
damage will be even greater in Latin America, which sends most of its
exports to the United States.
As if to prove the point, on a day when the Dow Jones Industrial
Average plummeted 512.61 points, or 6.37 percent, the Mexican
stock market was down 5.14 percent. Mexico canceled a regular
Monday auction of government treasury bills, known as CETEs,
saying that "the offers received were not consistent with the
macroeconomic situation of the country." It was the first time the
auction was canceled since the grim days in the wake of the 1994
devaluation.
The leading index of Brazilian stocks was off by 4.06 percent. Even
the stock market in stolid Chile was off 3.01 per cent. Venezuela,
surprisingly, was not hit, with its stock market in a modest rally of .18
percent.
"Latin America is the good neighbor in a bad neighborhood," said
Riordan Roett, director of the Western Hemisphere program at Johns
Hopkins University in Washington, D.C. The region's countries
"should not be affected, but they will be," he said.
Alejandro Hernandez, a top economist at the Instituto Tecnologico
Autonomo de Mexico, said, "Nobody has any really perfect defenses.
This is the challenge of the smaller economies in a globalized world."
In 1994, the region's problems were largely self-inflicted, and the
United States, then growing robustly, and the International Monetary
Fund were ready to step in with loans to help. Now Latin America is
paying for mistakes made in Moscow and Tokyo, which rattled the
markets and also sent prices for many key Latin commodities, like
wheat and oil, to their lowest real rates in decades. And neither the
United States nor the cash-strapped IMF can do much to rescue any
country here.
Mexico has done the most to clean up since 1994. Although the peso
has slipped (it recovered slightly Monday to 10.02 cents, up .4
percent), most analysts believe it is fairly valued. Oil revenues make
up 37 percent of the government's income, and President Ernesto
Zedillo responded quickly to the drop in petroleum prices by slashing
the federal budget three times, maintaining a modest deficit of about
1.25 per cent of the gross domestic product.
Growth, which boomed in the first half of the year, is expected to
slow through next year but remain healthy. The government is still
promising growth of more than 5 per cent this year, but economists
have revised their estimates down to 4 percent to a low of 2.3
percent, by Bursametrica Management in Mexico City.
Interest rates climbed Monday to 38 percent for the overnight Cete.
But after the drubbing that Mexican banks and indebted citizens took
in 1994, far fewer loans are out there now. Foreign reserves have
remained at record highs, with the influx of long-term investment in
factories and infrastructure, which now accounts for about 70 percent
of all foreign investment, helping to keep them there.
Mexico's big weak spot is its ailing banking system. The national
Congress, which will open a new session next week, remains angrily
divided about how to pay for an multibillion dollar bank bailout. On
Sunday, 3 million Mexicans turned out to vote against the
government's proposal in a symbolic referendum organized by an
opposition party, the Party of the Democratic Revolution.
"This is very far from classifying as a crisis," said Jonathan Heath, an
economist with LatinSource Mexico. "There is a lot of noise, a
psychological crisis. But while the financial markets are reflecting what
is happening in the rest of the world, the real economy continues to
grow."
Elsewhere, political factors are central. At the outset of the Asian
financial crisis last October, Brazil President Fernando Henrique
Cardoso marshaled through a package of reforms that doubled
interest rates and imposed steep tax increases and spending cuts. But
the fiscal deficit remains at nearly 7 percent of the economy. The
Brazilian currency, called the real, is traded within a fixed band and is
said by analysts to be overvalued by at least 10 percent. The Central
Bank said that $7.7 billion left the country in the four weeks before
Aug. 28.
But Cardoso appears to determined to forestall any devaluation and
even cut interest rates, at least until after the Oct. 4 elections. Polls
show that he is likely to win a second four-year term easily in the first
round. Brazil has huge foreign reserves of about $72 billion, and
several valuable government properties to sell in a crunch.
"We are going to face this crisis, as always, calmly without any new
package, without any scares," Cardoso told reporters in a brief
appearance Friday.
Venezuela faces the most severe problems, analysts say, primarily
because neither of the two most prominent candidates in presidential
elections in December hold much promise of bringing tough solutions
to a wayward economy. The front-runner, Hugo Chavez, 44, is
running on a populist platform of broadside repudiation of the
country's political elite for years of economic instability.
Another contender is a former Miss Universe, Irene Saez, who is 36
and has no experience in economics.
Venezuela has done little to reduce its dependence on petroleum,
which accounts for three-quarters of all exports.
In the longer term, economists are worried that investors' confidence
will be so shattered by a new round of losses in the emerging markets
that Latin countries will have trouble returning to the international
markets for help to pay their debts next year.
"It may be a long time before investors can differentiate and say that
Brazil is different from Russia. We could be in for a period when
nobody is willing to touch the emerging markets," said Sylvia
Maxfield, an emerging markets strategist at Lehman Brothers.
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