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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: djane who wrote (7633)	9/8/1998 1:18:00 AM
From: djane	Read Replies (1) \| Respond to of 22640

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.

To: djane who wrote (7633)	9/8/1998 1:27:00 AM
From: djane	Respond to of 22640

WSJ Front Page. Fed Plays Down Inflation Worry, Suggests Rate Cut Is More Likely [See bottom on Latin America] September 8, 1998 By DAVID WESSEL and JACOB M. SCHLESINGER Staff Reporters of THE WALL STREET JOURNAL As the U.S. Treasury secretary and the head of the International Monetary Fund pressed Japan to shore up its economy for the sake of the world's, the chairman of the Federal Reserve said the U.S. can't "remain an oasis of prosperity" in "a world that is experiencing greatly increased stress." Fed chief Alan Greenspan's comments -- emphasizing the effects of global developments on the domestic economy -- suggest that a reduction in U.S. short-term rates is now more likely than it was at the beginning of the summer. But neither Mr. Greenspan nor his colleagues have suggested that a rate cut is imminent. The Fed's policy committee next meets on Sept. 29. In his speech at the University of California at Berkeley, Mr. Greenspan said that the Fed no longer sees an outbreak of inflation as its primary near-term worry. As a result, he disclosed, Fed policy makers, who have been leaning toward higher interest rates since March, two weeks ago altered their stance and agreed that an interest-rate cut in the weeks ahead is about as likely as a rate increase. In the past two weeks, of course, the U.S. economic outlook has grown more cloudy with the plunge in the stock market. Mr. Greenspan acknowledged as much, saying that mounting problems overseas "feeding back on our financial markets" are likely to have a depressing effect on the U.S. economy in the near future. In Asia Monday stock markets staged a major comeback as investors seized on Mr. Greenspan's remarks. Mr. Greenspan emphasized the important role that strong American consumer and business confidence has played in sustaining the U.S. economic expansion. Turmoil on Wall Street could shake that confidence. Addressing that possibility, Mr. Greenspan sought to put the stock market's turmoil in perspective. "Just as a bull stock market feels unending and secure as an economy and stock market move forward, so it can feel when markets contract that recovery is inconceivable," he said. "Both, of course, are wrong. But because of the difficulty imagining a turnabout when such emotions take hold, periods of euphoria or distress tend to feed on themselves." So far, the strength of domestic demand, particularly in home building and other industries benefiting from lower long-term interest rates, has offset the economic pain caused by recessions elsewhere, a point that President Clinton emphasized in his weekly radio address Saturday. "While the Asian crisis has dampened exports, especially for our farmers, and caused losses for some financial institutions, the pillars of our prosperity stand solid," Mr. Clinton said. Meanwhile, Treasury Secretary Robert Rubin gave no sign after a meeting Friday in San Francisco with his Japanese counterpart that he has turned more optimistic about Japan's festering economic crisis. Need for 'Concrete Actions' "There has been a change in direction," said Mr. Rubin, who has been one of Tokyo's harshest critics. But, he added, Japan has yet to make clear crucial details and the speed with which any new policies would be implemented. "With respect to these issues, I think the judgment can only be made once Japan acts and it's seen what happens," he said. "I can't give you a better answer." His deputy, Lawrence Summers, also emphasized the urgent need for "concrete actions," as opposed to more plans and announcements. Mr. Rubin declined to say whether he had learned anything new from Japanese Finance Minister Kiichi Miyazawa, or had received any fresh, credible assurances that Tokyo is closer to addressing its recession and its banking crisis. In a separate news conference, Mr. Miyazawa said that Mr. Rubin had convinced him that the "sense of urgency" conveyed by Japan to date to the rest of the world "may not have been enough." Criticism of Bank Rescue He promised "all possible steps to promote financial stability," but he and Mr. Rubin also discussed the domestic political complexities that make swift action difficult, notably strong criticism of the government's bank-rescue package from the newly emboldened opposition parties. Mr. Rubin indicated that he hoped Japan's prime minister, Keizo Obuchi, would give a more concrete progress report when he meets President Clinton in New York on Sept. 21. Finance ministers and central bankers from Japan and the U.S. are to meet their counterparts from other wealthy nations in Washington early in October. Their deputies will meet before then in London, and second-tier economic officials from nearly two dozen countries, including the most severely hurt Asian nations, are to convene this week in Washington. U.S. officials complain not just about Japanese inaction, but about a continuing perception gap between the two governments about the extent of Japan's problems and the impact on the rest of the world. Mr. Rubin, in public and in private comments to Mr. Miyazawa, stressed how much Latin American finance ministers were preoccupied with Japan during a meeting in Washington last week. Following meetings with the Latin Americans, IMF Managing Director Michel Camdessus also stepped up the pressure on Japan, telling reporters, "Japan is the second most powerful economy in the world. The world can't work well if such a huge economy, which has been for so long the locomotive of the world, doesn't work properly," he said. "This is part of our ... frustration in Asia." The virulence of the now-global financial crisis, which began in July 1997, has led some people to question the wisdom of pursuing a policy of unfettered markets. But Mr. Camdessus insisted that wasn't an issue in the meetings with Latin American officials. "I didn't hear a single word for recommending any relaxation of the effort toward more openness, toward more liberalization of trade or capital controls ... no indication at all of temptations of protectionism," he said. Return to top of page \| Format for printing Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.