NY Times. Latin markets feeling fallout of Russian ills
mercurycenter.com
Published Sunday, August 30, 1998, in the San Jose Mercury News
Latin markets feeling fallout
of Russian ills
New York Times
MEXICO CITY
RUSSIA'S devaluation of the ruble has sent panic throughout
the world's emerging markets, with the Latin American economies
likely to be among those that suffer the most.
The crisis has pummeled the region's markets, caused currencies
throughout the region to drop and forced interest rates so high
that some bankers are urging customers not to borrow. Analysts
are lowering what had been healthy growth estimates for Latin
America for next year and perhaps beyond.
The International Monetary Fund has proposed a meeting of
Latin American finance officials for Friday and Saturday to
discuss how the global turmoil is affecting the region. The IMF
has also invited officials from the U.S. Treasury and Federal
Reserve as well as finance officials from Canada, said Michel
Camdessus, managing director of the IMF.
Trouble in the region is being compared to the most painful
financial disasters in recent years, including the regional debt crisis
that plunged dozens of Latin countries into recession in 1981 and
took more than a decade to unsnarl.
No one is yet predicting long-term economic disaster on that
scale. In many Latin countries, reforms including the privatization
of state-owned enterprises, the overhaul of banking systems and
the establishment of private pension systems have strengthened
local economic resilience. Barring unforeseen further disasters,
analysts still expect the region to grow this year. Warburg Dillon
Read is predicting regional growth of 2.8 percent in 1998, down
from 5.2 percent in 1997.
But what may be most frustrating in financial capitals from
Monterrey to Buenos Aires is that today, faraway contingencies
like whether China devalues the yuan or Japan reforms its
economy seem likely to have as much to do with market stability
as Latin America's own beleaguered policy-makers. Indeed, this
year's Latin malaise has come largely from Asia.
''After Mexico's devaluation in 1994, people feared the crisis
would spread to other regions, but it didn't,'' said Gray Newman,
senior Latin American economist at Merrill Lynch & Co. ''Things
calmed down. The difference between then and now is that today
contagion is alive and with us. The difficulties in Japan and Russia
are moving to Venezuela and Mexico.''
After a week of sell-offs since the ruble was devalued, Latin
American markets rebounded Friday, recovering some of the
ground lost. Mexico's Bolsa index rose 3.2 percent, Brazil's
Bovespa index was up 2 percent and Argentina's Merval index
climbed 1 percent. In Venezuela, where last week's worldwide
panic has been felt most acutely, the stock index went the other
direction, down 4.8 percent Friday, after a 5.8 percent drop
Thursday.
Investors fleeing
Investors have been fleeing Latin markets for months. The
Venezuelan stock market has plunged 66 percent for the year to
a 29-month low. The Mexican Bolsa is down 39.7 percent, and if
losses from the declining peso are taken into account, it is down
51 percent for the year. Shares have dropped 34 percent in
Brazil this year, 47 percent in Argentina and 35 percent in Chile.
Latin America's Brady bonds also lost ground last week as
traders, disappointed by the terms of Russia's local debt
restructuring, also unloaded Latin holdings.
What has alarmed many economists is that investors have been
abandoning local currencies and regional markets with little regard
for the strengths of individual economies, tarring all emerging
markets with the same rough brush.
David Malpass, chief international economist at Bear, Stearns &
Co., pointed to similarities between the current panic across Latin
America and the situation in 1981, when high real interest rates in
the United States and plunging worldwide commodities prices
sent the region into a tailspin.
''Some aspects of the current situation resemble the 1981 crisis,
which was a time of impending doom for Latin America,''
Malpass said. ''But there are reasons to be less pessimistic about
the current environment. The U.S. economy is growing today,
whereas in the early 1980s we were in deep recession. And
economic policies in most Latin countries are much better today
than they were in 1981.''
Gauging the fear
One gauge of the current investor fear of Latin investments is the
widening spread between the rates its Brady bonds pay and
equivalent U.S. Treasuries. A Mexican analyst quoted by Reuters
said that spreads on emerging market Bradies over Treasuries
until October 1997, when the Asian crisis really began to be felt
internationally, had been about 450 basis points. A basis point is
one hundredth of a percentage point. But since Russia effectively
devalued, spreads have widened to 1,150 basis points, the
equivalent of an additional 7 percentage points, the analyst said.
The financial turmoil has been greatest in Venezuela, where
plunging oil prices have worsened a chronic budget deficit and
raised fears of a currency devaluation. On Aug. 21, as thousands
of Venezuelans sought to exchange bolivars for dollars, the
government said the bolivar would be allowed to trade toward
the bottom of the band set by the central bank to regulate
exchange rates.
Interest rates up 60 percent
Faced with a potential assault on its currency, the Venezuelan
government needs to husband its $14 billion in foreign reserves.
As it tries to raise cash to finance its deficit, interest rates have
shot up to more than 60 percent.
A volatile Venezuelan presidential campaign, in which one leading
candidate has suggested that the country should stop making
payments on its foreign debt, has also alarmed investors. Some
analysts say the outcome of the December balloting may provide
an early indication of whether the region's economies are headed
for prolonged crisis.
So far, the biggest casualty among currencies has been the
Mexican peso, which has fallen 21.8 percent this year, to 10.07
U.S. cents.
The fall in the peso has been accompanied by a surge in interest
rates. Last week, the yield on Mexico's benchmark 28-day
Treasury bill surged to 27.2 percent, its highest level in 20
months.
In reaction, the head of the Mexican Banking Association urged
potential borrowers to avoid taking out loans. ''Rates are too
high, so I've told bank customers to wait a few weeks until this
market overreaction dies down,'' Carlos Gomez y Gomez, the
association's president, said.
The crisis in Mexico is being fed partly by the plunge in oil prices,
which have forced cuts in government spending, and by continued
haggling between political parties over accusations of corruption
in a banking scandal. But until last week's panic, some analysts
were still predicting more than 4 percent growth next year. On
Wednesday, Merrill Lynch revised its Mexico growth estimates
for 1999 downward to between 3 and 3.2 percent from 3.6
percent.
Lawrence Goodman, chief economist at Santander Investment,
said that even though sound economic policies in some countries
appeared to count for little amid the current panic, they would
pay off eventually.
''Even though the fear factor right now is resulting in a sell-off
across the board, every country has strengths and weaknesses
that will eventually lead investors to distinguish between
countries,'' Goodman said. ''Countries that have embraced
reform and have limited their reliance on foreign capital will have
helped to insulate themselves from the vagaries of international
market sentiment.''
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