Latin American Markets Hit Hard as Confidence Wanes

Latin American markets came under assault Tuesday in the biggest regional sell-off of stocks since the Indonesian economic crisis flared in January. Mexican, Brazilian and Argentine stock markets all took big hits, and the Mexican peso dropped to an all-time low of 8.77 to the dollar.

The falloff was blamed on this week’s surge in market volatility in South Korea, Russia and other emerging markets, prompting a renewed loss of confidence in most such markets. If prolonged, the turmoil could cut the flow of foreign capital that Latin American nations need to balance their budgets and pay their debts.

Moreover, it now appears that the cumulative financial effects of the Asian crisis on Latin America are worse than first thought, analysts said. The sharp drop-off in sales of oil, coffee, sugar, copper and other commodities in Asia are a strong indication that Latin American corporate earnings may not grow at all this year, and that hurts stock prices.

Latin stock price drops are “a perfectly rational market response to the dramatic decline in earnings expectations, post-Asian crisis,” said Salomon Smith Barney’s Jim Barrineau, a Latin American equity strategist. Before the Asian crisis began last year, his firm had projected 20% annual growth in the region’s overall profits.

The stage was set for Latin market sell-offs after South Korea’s stock market plunged 6% to an 11-year low Tuesday on growing concern about the social and economic costs of the currency-devaluation crisis that began last year.

Also, Russian bonds plunged in value amid signs that the country’s financial health is deteriorating.

Early today, the South Korean stock market fell further, with the main index losing 2.3% to 304.72. Selling was heavy across Asia early today, with Hong Kong stocks down 4% and Tokyo shares off 1.8%.

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In Latin America on Tuesday, Mexico’s Bolsa stock index tumbled 158.71 points, or 3.4%, to 4,453.73, the lowest close since Nov. 13.

In Brazil, the benchmark Bovespa index tumbled 579.22 points, or 5.8%, to 9,436.25, its lowest level in four months. The index has lost more than 18% so far this month.

Argentina’s Merval index retreated 4.9% to 595.97, dipping below the 600 mark for the first time since January. And in Chile, a 40-stock index slid 1.55 points, or 1.7%, to 90.69.

“It’s an ugly panic,” said Anibal Penet, who manages $230 million for pension fund Previsol in Argentina. “No one is coming out ahead by selling at these prices.”

But is this the beginning of a long slide for Latin markets or merely a temporary pullback?

Most analysts agreed Tuesday that there has been no fundamental deterioration in the region’s economies in recent weeks and that most countries are in better shape to withstand economic shocks than they were last year, or in 1995 when the so-called Tequila Effect of Mexico’s peso devaluation wrought havoc.

But the misfortunes of Asian countries are making foreign investors focus again on the risks of emerging markets, said Marcelo Audi, director of equity research at Merrill Lynch in Sao Paulo. And those investors seem to be moving in increasing numbers to safe havens in the United States and Europe, a trend that, if prolonged, could cause problems.

Should there be a severe reduction in the heavy flow of foreign capital to South American markets, the result could be “problems in balance of payments and reserves coming down, and in the case of Brazil, a possible speculative attack on the currency,” Audi said.

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Brazil, the region’s largest economy, is in perhaps the most precarious position.

President Fernando Henrique Cardoso is attempting the tightrope act of leading fiscal and economic reforms as he is trying to raise money through massive government privatizations, partly to pay down a widening budget deficit.

Although Brazil has rebuilt its foreign reserves to more than $75 billion since October, when they had sunk to $51 billion, investor confidence has been shaken by the legislative setbacks dealt some of Cardoso’s reforms, by rising unemployment and by the president’s declining popularity in an election year. All those factors have been blamed for the Bovespa’s steep decline this month.

The trouble in Brazil’s markets was blamed for the losses in Argentina, whose market moves in tandem with that of its larger neighbor.

In Mexico, the latest drop in the peso’s value, to record lows, comes as no surprise to economists: Many have been predicting a decline to 9 pesos to the dollar this year, said Hector Chavez, chief Mexico economist for Santander Investments in Mexico City. “But there is always the problem of how you get there and when.”

“I’m just surprised in terms of timing. There is no specific reason why this had to happen today,” Chavez said of the peso’s 1.5% drop against the dollar Tuesday. The peso has lost 9% of its value against the dollar since Jan. 1.

Nor is the drop in Mexican stocks any great mystery. Alfa, a Mexican steel and petrochemical company, was typical in saying profit growth is slowing because of increased competition from Asia, whose plunging currencies enable manufacturers to cut export prices and gain market share. Alfa shares fell 1.2% on Tuesday.

Also driving prices down is a “flight of foreign capital” out of Mexican stocks and bonds since the start of the year, Chavez said. “Last week, there was an outflow of $300 million,” he said, blaming a “general negative sentiment toward emerging markets.”

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Carlos Janada, economist with Morgan Stanley in New York, said investors are “generalizing the Asian situation with Latin America. . . . The view we have for the entire region is that on the economic front, Latin America seems to be in good shape.”

Yet the vagaries of investing in Mexico and other emerging markets were highlighted earlier this month by the drug-money-laundering bust in which more than 100 people, including at least two dozen Mexican bankers, were indicted, said Jeffrey Schott, senior fellow at the Institute for International Economics in Washington.

“It’s refocused attention on the rising problem of crime and the drug infiltration of Mexican business, so that’s a concern,” Schott said .

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Times wire services were used in compiling this report.

* RUSSIAN BUDGET CUT: Yeltsin ordered the federal budget slashed $6.5 billion. A1

* DOW OFF 150: The broad market’s weakness spilled over into blue chips. D4

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Latin Losses

Latin American stocks plunged Tuesday amid worries about Asian “spillover.” Year to date, Latin market losses now exceed many Asian markets’ losses.

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Market Tuesday change 1998 change S. Korea --6.0% --16.8% Brazil --5.8 --7.5 Argentina --4.9 --13.3 Mexico --3.4 --14.8 Malaysia --1.6 --5.6 Indonesia --1.3 +8.1 Thailand --1.2 --4.9 Hong Kong --0.7 --11.6

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Note: Changes measured in native currencies.

Source: Bloomberg News