IMF sees Latam risk of prolonged capital drought
Reuters, Wednesday, September 30, 1998 at 14:14
By Anthony Boadle
WASHINGTON, Sept 30 (Reuters) - The International Monetary
Fund warned on Wednesday that the current panic among investors
may not subside soon and capital flows to Latin American and
other emerging markets may suffer a prolonged disruption.
The fund said developing nations must reduce their
vulnerability and called on Brazil to rein in spending to
restore investor confidence.
In its World Economic Outlook, the IMF said Latin America
appeared to have been the region that was worst hit by the
"dramatic deterioration" in confidence since the Russian crisis
raised the specter of default on financial markets.
The panic virtually halted capital flows to Latin America
and further weakened the regions' growth prospects, which is
now forecast at 2.8 percent for this year, down from the 3.4
percent forecast by the IMF in May.
Even after the panic subsides, emerging markets are likely
to face considerably higher borrowing costs for some time, and
their access to international finance may remain significantly
reduced, the fund said.
The IMF expects private capital flows to emerging markets
to decline even sharper this year than previously forecast,
down to the lowest level since 1990, and then remain weak in
1999.
"A real risk is that the recent panic may fail to subside
for some time, which could imply significant net outflows of
foreign capital from many economies," the outlook said.
Investors' fears, reflected in the large yield spreads,
"could become self-fulfilling, and result in prolonged
disruption of international financial flows," the IMF said.
It said Brazil, Latin America's largest economy, had
weathered the Asian crisis well with tighter policies, but was
left vulnerable by its large and widening deficits and a big
stock of short-term public debt that was increasingly indexed
to overnight interest rates or the U.S. dollar.
"With the fiscal debt still running at 7 percent of GDP and
a significant current account deficit, efforts to rein in
spending and to improve the finances of state governments still
need to be strengthened to restore and maintain investor
confidence," the IMF said.
Brazil's growth will slow considerably in 1998 and 1999
from 3.2 percent in 1997, the fund said, though its forecast of
1.5 percent for this year was the same as in May.
Venezuela suffered the worst impact of the Asian crisis due
to its dependence on oil prices. The IMF forecast a 2.5 percent
decline this year after surging forward 5.1 percent last year.
"Venezuela also has a pending agenda of structural reforms
that are needed to put the economy on a sustainable recovery
path and to promote economic diversification," it said.
Confidence in Argentina's currency board arrangement has
survived the crisis, and there are no indications of capital
flight, the fund said.
"Nonetheless, a relatively heavy debt service burden for
1999 and a still large current account deficit point to a
difficult financing situation if the external turbulence were
to continue for an extended period," it said.
Argentina's growth forecast was reduced to 5.0 percent from
5.5 percent in May, compared to 8.6 percent in 1997. The IMF
warned that unemployment, which fell below 14 percent, could
rise again.
Banking reform, improved public debt management and recent
steps to cut fiscal spending in 1998 and freeze public spending
in 1999 helped Argentina's financial situation, the IMF said.
"Nevertheless, the economy, which has substantial trade
exposure to Brazil, remained vulnerable," it said.
Mexico's bond prices have fallen less sharply than in other
parts of Latin America, thanks to a more flexible exchange
rate, a smaller current account deficit and stronger links to
the still buoyant U.S. economy, the IMF said.
But the widening current account deficit shows the need for
continued fiscal restraint and structural reforms, the fund
added. Low oil prices and higher interest rates will mean
slower 1998 growth of 4.5 percent for Mexico, down from 4.8
percent forecast in May. Mexico grew 7.0 percent in 1997.
Chile's balance of payments has been hurt by low copper
prices and dependence on Asia for one-third of its exports.
The IMF marked down its growth projection for Chile this
year to 4.5 percent from 6.0 percent in May, reflecting a
tightening credit policy and the weak demand in Asia. In 1997
Chile grew 7.1 percent.
Oil price declines have meant slower than expected growth
for Colombia, where the IMF revised its projection down to 2.7
percent. Colombia grew 3.1 percent in 1997.
Fellow oil producer Ecuador will grow 1.5 percent this year
compared to 3.4 percent in 1997, the IMF predicted. Peru has
slowed to 3.0 this year from 7.2 percent in 1997, it said.
Copyright 1998, Reuters News Service |
