Crises Taking Heavier Toll in Latin America

Mexico on Wednesday reported slower economic growth while Brazil and Venezuela were roiled by worries that they may be forced to devalue their currencies--the latest signs that economic crises in Asia and Russia are taking a heavier toll on Latin America.

Slowing growth in Mexico and devaluations throughout Latin America could pull down economic growth around the world and add to pressures for another round of devaluations in Asia, as struggling countries jockey for competitive position in the global export market.

Mexico reported second-quarter economic growth of 4.3%, below the 4.6% that some economists expected and below the first quarter’s 6.6% rate. The news sent the battered Mexican stock market down another 1.2%, as investors worried that weaker growth will depress corporate profits.

Mexico’s slowdown is the first indication that three government spending cuts totaling $3.3 billion are beginning to take a toll on the economy. The cuts were prompted in part by lower oil prices, which have put pressure on government revenue.

Mexico may also be feeling the effects of rising Asian export competition and slower U.S. growth.

Weaker growth could increase political pressures on the administration of Mexican President Ernesto Zedillo while sparking higher unemployment and other social strife. One million jobs must be created in Mexico annually just to keep up with population growth.

Some analysts said Mexico’s outlook remains relatively healthy. “The bottom line here is that although there has been a deceleration, it has not been as strong as some of the pessimistic people thought,” said Fernando Losada, senior economist at ING Barings.

In the first half of the year, Mexican exports rose 11%, down from a 15% growth rate last year.

In Brazil, meanwhile, the main stock index slid 1.2% on Wednesday on concerns that Russia’s devaluation of the ruble this week could force Brazil to take the same road eventually to stay competitive.

Despite government assurances Wednesday that recent foreign capital outflows were unrelated to Russia’s problems, Brazilian interest rates jumped.

Mauro Guillen, an economics professor at the Wharton School in Philadelphia, blamed the renewed nervousness about Brazil on the plight suffered by emerging markets generally amid the economic crises in Asia and Russia. Brazil’s fundamental economic status remains good, he said. Inflation is at its lowest level since 1949.

Still, many investors have been shocked by the more than 27% drop in Telebras shares since the government privatized the state-run telephone utility July 29. Traded as so-called American depositary receipts on the New York Stock Exchange, Telebras continued to fall Wednesday, losing $3.13 to $91.88. The shares closed at $124.38 on July 30.

Even observers who expect a Brazilian devaluation say it won’t happen until after the December presidential elections. The Brazilian currency, the real, is slowly devaluing at a controlled annual rate of about 8% against the dollar, a rate the government vowed Wednesday to defend with treasury reserves that now stand at about $70 billion.

Brazil doesn’t want the kind of sudden devaluation that other countries have faced, because such moves can shock economies into recession.

Devaluation may be a more pressing concern in Venezuela, analysts said. Devaluation rumors caused overnight interest rates to triple to 90% on Wednesday from 30%, as the government sought to defend the currency. Stock prices fell to a 27-month low.

The jump in interest rates is causing the country to consider canceling a $1.4-billion bond offering it had planned to float to help it finance a $3-billion budget deficit caused by lower oil prices.

A Venezuelan devaluation could provide the government with a short-term fix to its mounting budget deficit, giving it more of its currency, the bolivar, for the dollar-denominated oil it sells.

As a condition of financial assistance, international lending agencies are urging Venezuela to establish an oil stabilization fund. Surplus oil revenues earned in times of high oil prices could be parked there to tide the country over in times such as these when oil prices plunge. Chile and Colombia have similar funds for copper and coffee.

The Venezuelan currency has already lost 12% of its value against the dollar this year, a reflection of the government’s lack of political will to shrink budget expenditures in line with the 30% drop in oil revenue.

Also spooking investors is the prospect of a victory later this year by populist presidential candidate Hugo Chavez, who led an unsuccessful coup attempt in 1992. Chavez is leading in the polls.

Turmoil in Russia and Asia isn’t the only major problem confronting Latin American economies these days.

The El Nino weather phenomenon has cost Peru about $700 million in damages while inflating its trade deficit because of lost exports of commodities such as minerals and fish. Brazil could also lose substantial commodity revenues, especially in coffee, if a strike persists in Santos, where dockworkers are protesting the privatization of the port facilities.

Bloomberg News was used in compiling this report.

* RUSSIA STALLS REPAYMENT TERMS: Russia delayed announcing terms for repaying its ruble debt. D3

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Mexico Slows

Mexico’s growth rate slowed in the second quarter, hurt in part by weaker government spending. Year-over-year annualized change in quarterly gross domestic product:

1998: +4.27%

Note: Data unadjusted for seasonal variations.

Source: Bloomberg News