WSJ. Moscow's Woes Compound Problems in Latin America
September 8, 1998
By THOMAS T. VOGEL JR. and MATT MOFFET
Staff Reporters of THE WALL STREET JOURNAL
As investors cut and run from Latin American bonds and equities,
economists are once again trimming growth estimates for the region.
The generalized rout of emerging markets since Russia's ruble devaluation
has compounded the economic woes of a region already suffering from
low commodities prices, slowing export demand and high local interest
rates.
"The outlook has unequivocally gotten worse" thanks to the Russian
devaluation, says Lawrence Goodman, chief economist at Santander
Investment. "The impact is a sudden shrinkage in the available pool of
capital for Latin America, the residual region for global capital flows," he
says.
Growth Outlook Worsens
ING Barings has cut its gross domestic product growth projections for the
major economies of the region five times so far this year to 3.1% as of last
week from 4.2% at the end of last year, Latin America economist Michael
Henry says. Next year's outlook is even worse. Mr. Henry sees average
growth of 2.9% next year for Argentina, Brazil, Chile, Colombia, Ecuador,
Mexico, Peru and Venezuela, compared with 3.7% just last month.
Although few are predicting the sort of economic decline that hit Latin
America after Mexico's 1995 financial crisis, even a few percentage points
in lowered growth rates can be significant, given the huge numbers of
unemployed workers.
The effects from the latest market swoon already are evident in factories
and shopping malls in Brazil, the region's largest economy. General Motors
Corp. announced last week it would stop production in one plant for 10
days because of slowing exports. The slack production schedules of
Brazilian makers of refrigerators and washing machines reflect their
expectation of a weak holiday season. At Moinho Pacifico Industria &
Comercio Ltd., a big Sao Paulo wheat-milling company, skittish banks are
starting to ask for greater guarantees to back grain imports. "Before, the
crisis was across the ocean in Asia or Russia, but now it's being felt on our
continent," says Lawrence Pih, Pacifico's president.
Among the hardest hit will be Venezuela, which ING sees going into a
recession next year. At the end of last year, ING had projected 5.7%
growth for Venezuela for this year, compared with just 1% now.
More than any other developing region, Latin American nations and
companies depend on the good will of international lenders for the cash
they need to fund new investments and cover budget gaps. Latin American
borrowers accounted for about two-thirds of all emerging markets
borrowing during the past two years, says Joyce Chang, emerging markets
debt strategist at Merrill Lynch & Co. in New York. Total borrowing in
emerging markets hit $89 billion last year, Ms. Chang says, and $63 billion
so far this year. But during the past month, the well has dried up. Emerging
market borrowers were able to sell just $2.6 billion in debt last month,
compared with more than $11 billion in August 1997.
Low Savings Rates
Unlike the typical Asian nation, Latin American economies sport very low
domestic savings rates and rather shallow local credit markets. So when
Venezuela, Mexico or Brazil need big bucks, they must turn to the
international credit markets to find them. "The bottom line is that Latin
America needs foreign capital to grow because domestic capital markets
are weak and underdeveloped," says Carl Ross, a managing director at
Bear, Stearns & Co. in New York. The looming capital shortage is "going
to have a pretty significant impact on investment rates and growth rates in
general," he says. The shortage of cheap credit is likely to continue well
into next year, say analysts.
To make up the difference, governments have had to cut spending and
raise interest rates to slow borrowing and protect their currencies. But
economic growth suffers. Mexico, Colombia, Venezuela and Brazil
already have made these moves and are likely to be forced to take further
measures. On Friday, Venezuela announced plans to cut another $160
million in spending, on top of more than $4.5 billion so far this year.
Venezuela had hoped to borrow more than $1 billion abroad later this
year but the credit crunch means it would have to pay as much as 25% to
do so, compared with about half that a couple of months ago. Mexican
banks decided on Friday to suspend temporarily consumer loans and
mortgages because of the rise in local lending rates and market volatility.
Late last Friday, after Brazil had lost about $17 billion in hard currency
reserves in the previous five weeks, the Central Bank laid down the
gauntlet: It raised the annual interest rate at which it lends to Brazilian
banks to 29.75% from 19%.
"We have to reconstruct investor confidence," says Francisco Lopes, the
Central Bank's director of monetary policy. "The government is making the
right response, which has costs on the eve of an election."
Indeed, President Fernando Henrique Cardoso, who is seeking a second
term in October's presidential vote, is betting Brazilians will find harsh
monetary austerity preferable to a chaotic currency devaluation. This
weekend, the government was studying budget-cutting measures to offset
the negative budgetary impact of the rate increase.
Debt Ratings Cut
Reflecting the pressure on the region, Moody's Investors Service last
week cut the debt ratings of Brazil and Venezuela. Brazilian policy makers
were indignant. "This decision represents ... the search for a very
conservative position, as a way of preserving reputations in case something
happens in the future," Brazilian Finance Minster Pedro Malan says.
To some extent, indeed, the punishment of Latin America is unfair.
Investors are, in effect, saying Latin risks are the same as Asian or Russian
risks, which are very different. The region has been pushing economic
reforms since the early 1990s by opening markets and privatizing state
assets. But most Latin American nations have done little to increase local
savings and deepen local debt markets, so they must go abroad to raise
cash.
"The nations of Latin America that are likely to weather the storm better
are the ones which have made advances in domestic savings rates," Mr.
Goodman says. He singles out Argentina and Chile for their efforts to
promote private pension plans, which attract more than $350 million in
new money each month in the case of Argentina.
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
