Latin America Weathers Storm in Global Markets

Despite a bumpy ride, Latin America is withstanding this week’s global market turbulence, leaving economists sanguine about the region’s prospects and attributing the recent shocks to an inevitable spillover of the Asia crisis.

Latin stocks’ roller coaster ride continued Thursday with Brazil’s all important Bovespa market index surging to its biggest one-day gain this year, closing up 4.15% to recoup part of the losses suffered earlier this month. Argentina’s market gained 1%, and Mexico’s key IPC index slipped a fraction.

Almost unanimously, analysts voiced optimism about most Latin American economies this week on grounds that inflation has been tamed, foreign reserves are on the rise, economies are growing and banking systems are being cleansed and modernized. Where trade and budget deficits exist, they are seen as manageable. So chances of a meltdown of the sort that has rocked Asia are small.

Which is not to say that problems in other parts of the world will not continue to cause anxiety. The current turmoil in Russia, Indonesia, South Korea, India and Pakistan have once again put Third World and emerging markets under a harsh spotlight. And that includes Latin America.

This has caused steep declines in Brazilian, Argentine and Mexican stock markets this month. Investor interest in Latin American bonds has dried up, despite interest rate premiums of three to four points above what’s available with U.S. bonds.

The Mexican peso has lost 3% of its value versus the dollar in the last two weeks and 9% this year, although it strengthened slightly to 8.78 pesos per dollar Thursday. The Mexican Bolsa’s loss of 12.30 points brought the index to 4,468.06 points, 14.5% off the 5,229.35 at the end of 1997.

“I don’t think there is any underlying logical reason for these stock market problems,” said Barry Bosworth, an economist with the Brookings Institution. “There is nothing that’s changed about fundamental economic situations in the region, but people in equity markets are getting very nervous.”

The fundamentals of Latin economies on the whole are far stronger than in past years, economists say. Argentina, Chile and Mexico will all see economic output grow at rates of 5% or more in 1998. Even Brazil, the region’s biggest economy and most pressing current concern, should grow 2%, despite a current recession that caused the economy to shrink by 1% in the first quarter.

Inflation is falling or under control in places like Mexico and Brazil, where it had been a chronic problem. And countries like Mexico and Chile are applauded for the spending cuts they imposed in response to the steep drops in oil and copper prices.

“The reality of the matter is Latin American economies, in spite of the slowdown in the international economy in 1998, have done relatively well,” said Albert Fishlow, senior fellow at the Council on Foreign Relations.

Mexico has raised its foreign reserves to $30 billion, from just $2 billion in late 1994 after the peso crisis nearly wiped them out. Brazil’s reserves stand at more than $70 billion, up from $52 billion last November, when a run on the currency there caused a depletion. Higher reserves mean governments are better armed to defend currencies and pay their debts.

“The fundamentals are quite good in Mexico, not quite as good in Brazil, almost too good in Argentina,” said Sidney Weintraub, a political economist with the Center of Strategic and International Studies in Washington.

Banking systems in those three key nations are also in better shape than a few years ago, and far stronger than in Thailand, South Korea and Indonesia, where banking problems were a primary cause of economic collapse.

“When you have bank failures, people can’t get money out, lending is cut back, and the economy is affected. It takes a period of time before people again feel able to trust them,” said Fishlow.

There are problems. Mexico’s peso is steadily losing value against the dollar, although at a rate that Fishlow says is “within bounds.” And Brazil’s budget deficit is widening, defying the history of Argentina and Chile where privatization of industry produced the opposite effect.

Brazil also has too much foreign debt at $210 billion, Brookings’ Bosworth says. At the rate of more than 7%, Argentina is growing too fast and is “sucking in imports” at a rate that is creating a widening trade imbalance, Salomon Smith Barney economist Desmond Lachman said.

But several countries that were knocked for a loop by dropping commodity prices have acted with admirable fiscal restraint. Tumbling oil and copper prices depress government revenues in places like Venezuela, Colombia, Chile and Mexico, and all cut spending as a result, surprising many analysts in the process, Weintraub said.

“The thing that struck us was that when bad things happened like the drop in oil and commodities prices and when Brazil’s president didn’t get his budget cutting measures through Congress, everyone acted responsibly. Experience told us not to expect it,” Weintraub said.

Lawrence Goodman, chief economist at Santander Investments in New York, said he is encouraged by signs that Mexico’s inflation is “undershooting expectations” and could fall to 14% or less this year, from 19% last year, a sign of fiscal discipline.

“You take all this together and this is still a region that in terms of fundamental conditions is doing much better than it was in [the early] 1990s. They are increasingly open economies and more involved in global markets and have abandoned their inward-oriented economic policies,” Bosworth said.