Asian Blues Make Way to Distant Shores

The common wisdom is that Latin America has weathered Asia’s economic crisis just fine. But that is not entirely true. Across the region, projects are being derailed, and tensions are rising.

The fact is that foreigners, rattled by Asia’s meltdown, are cutting back sharply on their Latin American investments, a trend that is causing ballooning deficits, swooning stock markets and sinking economic growth.

Disappointment is almost palpable in this small northern Peruvian town. Earlier this year, the locals were gearing up to start construction on one of the world’s largest copper mines in the nearby mountains.

The Canadian mining firm Cambior was poised to spend a staggering $2.2 billion on the project and hire close to 1,000 employees, providing much-needed jobs.

But that was before copper prices, undercut by a collapse in demand from Asia, tumbled from more than $1 a pound late last year to the current 70 cents. Asia, it seems, no longer needed much copper for wiring in construction and computers.

Now Cambior has put plans for the Peruvian mine on hold indefinitely until copper prices rebound. Cambior has also slammed the brakes on an $800-million copper project in Argentina.

Indeed, the rising tide of direct investments that foreigners have been pouring into oil pipelines, retail chains, power plants, auto factories and other Latin projects at an average annual growth rate of 28% will actually decline 9% this year from last, according to financial analysts.

And that’s not all. Half the $4.1 billion that Latin America-only mutual funds boasted last October has since fled to safer areas, such as Wall Street. It’s part of investors’ flight from emerging markets to more stable environments.

“The funds’ outflow began with a vengeance, and it’s unprecedented. Even after the Mexican peso crisis in 1994, you had a bounce up,” said Jim Barrineau, an equity strategist at Salomon Smith Barney.

Confidence in Latin American Region

But economists here seem confident, even serene, that the region can withstand the worst effects of the Asian contagion. Barring a complete collapse in Japan--the whole world’s nightmare--they insist that the effects will be short-lived and manageable.

They attribute the investor flight more to short-term skittishness about Third World economies in general than a reaction to the hemisphere’s basic economic strength, which they say remains strong. Despite the chill winds from Asia, economic growth in the region will be positive in 1998. And inflation, a perennial nemesis in Brazil and elsewhere, is firmly in check.

The underlying reason for long-term optimism is that Latin American countries have already instituted many of the fundamental reforms that Asian countries are now rushing to put in place in banking, investment and other industries.

Those changes have led to stronger and sounder financial systems than in 1994, when the Mexican peso crisis shook the region with its “tequila effect.”

“The financial systems are solid, so there has been no loss of confidence as there has in Asia. But until the crisis is resolved, there will be uncertainty, and that could be with us until 1999,” said Juan Luis Bour, an economist with FIEL, a think tank in Buenos Aires.

A Flow of Desirable Foreign Capital

Largely because of reforms and the improved business climate, more than half the foreign capital flowing into Latin America is the desirable kind: money directed at brick and mortar factories, offices and other long-term investments, according to Santander Investment of New York.

In the early 1990s, such “direct investment” was less than 15% of the money entering the region. The rest was mostly “hot money” looking for short-term profits in stocks and bonds.

This dramatic shift in Latin American investment is important because it has lent more stability to governments as they try to maintain economic equilibrium, Santander economist Lawrence Goodman said.

“We have seen a plunging of capital flows to emerging markets . . . especially in short-term or speculative instruments. But because of many companies’ expansion strategies, long-term capital is picking up the slack,” Goodman said.

Still, direct investment in Latin America overall will fall to $47.7 billion this year, down from $52.9 billion last year, Goodman said.

Much of the reduction is because of cancellations of manufacturing projects by hard-pressed Asian companies. But Brazil remains a prime beneficiary of foreign investment and will see 20% growth in that category in 1998, bucking the overall decline in the region.

“The medium- and long-term prospects for the Brazilian economy are certainly brighter than the short term, and you’re seeing that reflected in the surprisingly good investments we are attracting from outside the country,” said Paulo Levy, research coordinator at the Institute for Applied Economic Research here.

Levy noted that successful multibillion-dollar bids have been made this year by foreign companies for pieces of Brazil’s state-owned telephone utility, Telebras, for one of the largest Brazilian banks and for a Sao Paulo electric utility.

Still, no one here dismisses the Asian impact. The crisis will cause a 5% drop, or about $10 billion, in Latin American exports this year, which will lead to widening trade deficits, especially in nations such as Chile, Peru and Venezuela, which are heavy exporters of commodities, notably oil and copper. Trade deficits are nettlesome because countries have to finance them by borrowing at home or abroad.

The crisis will slow the region’s economic growth rate by a projected 40% this year, to about 3% from a hoped-for 5% across the continent, according to Santander Investment.

“Exports are a dynamic sector, so when they drop it results in a lower rate of economic growth overall. Consumption can’t grow as fast, nor can job creation,” said Sebastian Edwards, international business professor at UCLA’s Anderson School of Management.

A Double-Barreled Effect on Trade

The Asian crisis’ primary effect has been double-barreled as far as trade is concerned. First, it has caused the shrinkage of Asian markets for products ranging from Chilean copper and Argentine beef to Mexican auto parts and Brazilian steel.

Secondly, Latin American exporters have lost ground in markets including the United States and Europe because of the “substitution effect”: customers substituting Asian goods like steel and textiles that, due to the devaluations, are now cheaper than Latin American goods.

The loss of Asian markets has turned the once-sunny profit prospects for 1998 Latin American stocks to dismal.

It’s no wonder, then, that portfolio investors, such as those who had Latin American mutual funds, are pulling the rip cord. “It’s warranted,” Smith Barney’s Barrineau said.

After last year’s 52% rise, the Mexican stock market has stumbled badly this year, falling 22.5% in dollar terms since Jan. 1.

The flip side of the coin is that Mexico has learned from its own errors since the peso crisis. It has boosted exports, private investment and internal savings, generating a recovery in domestic consumption and real wages this year that has helped offset the drop in world oil demand.

The Asia effects are also pronounced in Chile, where copper represents about half the total exports and 20% of the federal budget, said Albert Fishlow, senior fellow at the Council on Foreign Relations in New York. Copper prices recently hit an 11-year low and are down more than 30% from last year, due mainly to slack Asian demand.

Despite that, Chile’s economy is expected to grow 5% in 1998, a rate most countries would more than settle for. And Chile is not the only South American economy expected to show good growth this year. Argentina’s economy, for example, is predicted to grow more than 5%, Mexico’s by more than 4% and Brazil’s by 2%.

“Economies will continue to suffer and will feel the crunch in the commodity markets. But there’s no question that they are in better shape than they were,” said Rafael de la Fuente, an economist with Paribas investment bank.

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Times correspondents James F. Smith in Mexico City and Juanita Darling in San Salvador contributed to this report.