A Brazilian Devaluation Would Disrupt Latin
America
By CHRISTOPHER CHAZIN
Dow Jones Newswires
BUENOS AIRES -- If things look bad in Latin America now, imagine the
chaos from a devaluation in Brazil.
Most economists are hesitant to even discuss the possibility of a real
devaluation, let alone the potential impact. And even as cash continues to flow
out of Brazil, analysts generally agreed such a move - repeatedly denied by the
government - wouldn't come until after presidential elections Oct. 4, if it were
to come at all.
"I think a devaluation isn't an option here," said Vinod Sehgal, SG Cowen's
Latin American equity research.
But a forced devaluation of the Brazilian real likely would wreak havoc on the
region, where on Thursday such fears and a tanking Wall Street sent stock
markets plunging and weakened currencies from Mexico to Chile.
Most impacted likely would be neighboring Argentina, with its rigid
fixed-exchange rate and close trade ties to Brazil. Still, economists say its
peso's one-to-one peg to the dollar - known as convertibility - likely would
survive intact despite a Brazilian devaluation.
"The chances of Argentina leaving convertibility is zero," said economist Aldo
Abram, director of Buenos Aires think tank Estudio Proeco.
Elsewhere, a Brazil devaluation would put increased pressure on currencies
regionwide, and could force the weakest players - Ecuador and perhaps
Venezuela - to follow suit, analysts said.
And regional growth, already slowing due to slack oil and commodity prices,
would downshift even further as the current capital outflows turn into a flood,
economists said. "You would kiss growth good-bye," Sehgal said.
"I believe the government is fully aware that the stakes are high, and will do
everything it possibly can - including raising interest rates again - to prevent
such an occurrence," said Fergus McCormick, sovereign analyst at Duff &
Phelps Credit Rating Co., one of two agencies that Wednesday put Brazil on a
negative credit watch.
Late Thursday, the Central Bank did just that, unexpectedly hiking the interest
rate at which it lends to banks to 49.75% from 29.75%.
McCormick and other analysts emphasized that Brazil still has room - though
not much - to maneuver. The Central Bank said Friday its foreign exchange
reserves stand at $52 billion versus $70 billion at the end of July.
Aside from raising interest rates, Brazil also could use capital controls to halt
such dollar outflows - something the government has repeatedly said it won't
do. SG Cowen's Sehgal called controls a "more palatable" solution to a
devaluation. "You can call it temporary, you can finesse it," he said. "There's no
finessing a devaluation".
One analyst said a devaluation might even be positive for the rest of the region.
"It all depends on how it would be conducted. If accompanied by a fiscal
package that the market deems credible, I think it could actually have a
positive impact," said Salomon Smith Barney Inc's Jim Barrineau.
"People are still hoping for the best," Barrineau said. "The government has
some tools at their disposal, and (a devaluation) is not a foregone conclusion
by any means."
Johns Hopkins University's Riordan Roett expects Brazil to "hold its breath"
until Oct. 4, hoping President Fernando Henrique Cardoso can win a quick
first-round reelection.
If Cardoso does win, "I have no doubt that on Oct. 5, they come in with real
fiscal adjustments" to weather the storm, said Roett, head of the Latin
American department at Hopkins' school of advanced international studies.
For Argentina, meanwhile, a devaluation would drive the economy into
recession, as investment and consumption - which account for about 92% of
its gross domestic product - come to a halt, said Proeco's Abram.
"Next year, GDP is supposed to grow by about 4%," he said. "If Brazil were
to devalue in December, the (Argentine) economy would shrink by about 2%."
Though a third of Argentine exports go to Brazil, Abram said concerns about
the trade-related impact of a Brazilian devaluation are overstated. Total
exports account for 8% of GDP, and sales to Brazil 2%, he said.
Still, others warn future Brazilian austerity measures could hurt Argentina's
trade competitiveness, sparking an inflow of cheap Brazilian imports and
putting added pressure on its trade and current accounts.
"Whatever measures it takes, even if it's not a devaluation, we have to plan
some form of emergency mechanisms," said Roberto Lavagna, a former
Argentine trade negotiator and now head of think tank Ecolatina.
A Brazilian devaluation also would spell trouble for the Southern Cone
Common Market, or Mercosur, the customs union of Argentina, Brazil,
Paraguay and Uruguay.
Unilateral measures to ward off crises, such as boosting tariffs to keep out
imports, are harder to do under the constraints of Mercosur.
"A devaluation in Brazil throws Mercosur up in the air," Hopkins' Roett said.
"You'd see neither an expansion of the bloc nor a deepening of its institutions."
Elsewhere, a Brazilian devaluation would add to the pressures on many of
Latin America's currencies and stock markets. "International markets don't
differentiate, particularly in nervous times like these," said Hubert Escaich, an
economist at the Economic Commission for Latin America and the Caribbean,
a United Nations agency.
In Chile, weaker revenues from companies that have pushed into Brazil and
Argentina would likely weigh on the select IPSA stock index, already off about
45% in 1998, said Jose Miguel Infante, header trader at Santiago brokerage
De La Cerda y Hutton.
Venezuela, seen to be teetering itself, might suffer further from a devaluation in
Brazil, though analysts cited increased faith that the central bank, with over $15
billion in reserves, will defend the bolivar. BT Alex.Brown's chief Latin
American economist Robert Gay, meanwhile, praised Venezuela's recent
package of over $500 million in spending cuts and $440 million more in
revenue.
"If Brazil is forced to devalue, I don't think it would change the picture for
Venezuela in the short-term," Gay said. "In the long term, it would cement the
need for a devaluation."
In Mexico, the peso closed at 10.6000 per dollar Thursday after hitting a low
of 10.7000, versus Wednesday's rate of 10.3200, despite central bank
intervention to shore up the currency. "The floating currency already is
absorbing a lot of the pain in Mexico," Salomon's Barrineau said, adding,
"That's the market that's going to bounce back first" when the crisis ends.
Peru also would likely weather a Brazilian devaluation, thanks to rising foreign
reserves that, at $10.5 billion, are equal to about 18% of GDP.
Milton Perez, a macroeconomic analyst at Lima brokerage Hildebrandt and
Ferrar, said Peru "almost surely" can avoid a devaluation, and "all indications
are that the economy will bend but not break."
-By Christopher Chazin; 541-315-1690; cchazin@ap.org
(with Helen Murphy in Buenos Aires; Daniel Flynn in Caracas; Felipe Ossa in
Santiago; Tony Harrup in Mexico City; and Eric Lyman in Lima)
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