From the NY Times:
As Brazil Phone Stocks Dive, So Do Latin Markets
Related Articles
Brazil's Economic Half-Steps (Aug. 1)
Seeing Green in Latin America's Blue Chips (May 25, 1997)
A Missed Opportunity in Latin America (Nov. 9, 1997)
By DIANA JEAN SCHEMO
ARACAS, Venezuela -- Three weeks ago, Brazil celebrated Latin America's largest privatization, selling its stake in
the giant phone company Telebras for almost $19 billion, roughly 70 percent above the asking price.
Optimism over Brazil's long-term economic prospects remains high. But Telebras, along with a slew of other equities from
here to Buenos Aires, has taken a stomach-churning dive in value since the auctioneer's gavel came down on July 30. Its
American depository receipts closed Tuesday at $95, down from $124.625 when international phone companies seized the
chance to buy stakes in the Brazilian communications market.
As the most liquid and widely traded of the Latin stocks, Telebras -- formally Telecomunicacoes Brasilieras SA -- reflects a
broader skittishness toward emerging markets that has been building all year, worsened by a recent new round of selloffs in
Asia and Russia.
Here in Caracas, the market has fallen 55 percent this year. Chilean shares are 21 percent lower, and Argentina's Merval
index has dropped by 30 percent.
This month alone, the main gauge of Brazilian equities, the Bovespa index of Sao Paulo, dropped 19 percent. Mexican
stocks, hardest hit this year of all the major Latin American markets, have lost 39 percent of their value. All those losses are
in local-currency terms; against the dollar, the damage is worse yet.
Brazilian financial magazines are sounding alarms over the "Yellow Fever" and "Red Hell." Some analysts, like Ernest (Chip)
Brown of Morgan Stanley, predict that Russia's decision Monday to devalue the ruble as much as 34 percent and delay
payments on some debts will intensify pressure on Brazil, Argentina and Mexico to devalue. Throughout Latin America,
expectations of economic growth have shrunk, in part because of Asian and Russian problems, but also because domestic
failures are becoming more acute.
In Mexico, for example, the government has raised reserve requirements on banks for the third time this year, a move
expected to result in higher interest rates. In Colombia, four years of Ernesto Samper's troubled presidency left public coffers
empty. With the sharp drop in oil prices, Venezuela is watching the bottom fall out of its economy.
Paulo Leme, chief of emerging markets at Goldman, Sachs, told the Brazilian newspaper Gazeta Mercantil, "Today, Russia
presents a 90 percent chance of not honoring its commitments, and, in Latin America, there are cases in which this index
reaches 50 percent."
Eduardo Cabrera, chief Latin American strategist at Merrill Lynch, said that despite the drop in price of Telebras shares, the
companies that bought chunks of the vast telecommunications holding company -- MCI, Telefonica of Spain and others --
would have probably paid the same premium Tuesday. "Any phone company that wants to do anything in Latin America
has to be in Brazil," Cabrera said.
Two months before presidential elections in Brazil, the economic forecasts of President Fernando Henrique Cardoso and his
finance minister, Pedro Malan, are considered optimistic. Both insist that despite international instability, Brazil, with its
$70 billion in international reserves, is far more secure than other Latin nations or economies in Asia. They argue that
investors have learned to distinguish between Brazil's and other emerging markets.
Investment flows in and out of Brazil, however, present a different picture. In the first 10 days of August, investors took
out $133 million more than they invested in Brazilian equities. In part that was general skittishness, but it also reflected a
worrisome failure on the part of Cardoso's government to control spending and overhaul the Social Security system.
Many analysts contend that the government is holding the Brazilian economy together with a special effort until the
elections on Oct. 4, but will be forced to devalue the currency, the real, or finally come through with austerity measures after
the votes are counted. |
