Brazil Leads Region’s Rebound

Key Latin American markets stormed back and ended the week at three-month highs as investor confidence grew that the region is managing to fend off the global financial crisis that ravaged Asia and Russia earlier this year.

Analysts were far from willing to pronounce the end of the threat to Latin America, but they welcomed the growing stability in the region, which is good news for the United States as well.

In Sao Paulo, Brazil’s Bovespa index rose Friday for a fifth straight day, bringing the total increase this week to 16.6%, on signs that the International Monetary Fund expects to approve a $30-billion credit package Monday or Tuesday.

After months of capital outflows over fears of a possible devaluation, Brazil received $200 million in net investment Friday. It marked the first time Brazil has had two days of positive foreign-exchange flows since the Russian crisis erupted in August.

Mexico’s main stock index also rose to an 11-week high and has now gained 20% in five weeks. The Mexican peso also has firmed in recent weeks, from a September low of 10.60 to the dollar to Friday’s close of 9.97. The peso thus has climbed back above the psychologically important level of 10 to the dollar.

“The Mexican peso is one of Latin America’s most liquid assets and is an accurate gauge of investor sentiment throughout the region,” said Siobhan Manning, PaineWebber’s Latin America debt strategist in New York.

Other Latin American markets and currencies are benefiting from optimism that Brazil will avoid a disastrous devaluation and economic collapse because, as the continent’s largest economy, it exerts an enormous influence across the continent.

Michel Camdessus, managing director of the IMF, said in Philadelphia that Latin American governments had taken vital steps to respond to the crisis and position themselves to withstand further shocks.

“This preemptive action is helping to defuse potential crisis in the region,” he said.

In Brazil, investors took heart from President Fernando Henrique Cardoso’s first major political victory since his reelection last month: Congress on Thursday endorsed his plan for a broad reform of the social security system. Expectations of quick agreement on the IMF credit package further boosted sentiment not only in Brazil but throughout the region, which has lived with weeks of uncertainty about a potentially contagious crash in Brazil.

“There’s been a big improvement in the outlook since September,” said David Malpass, chief international economist for Bear, Stearns & Co. in New York. “We have a trickling back of confidence.”

Brazil’s stocks rose Friday to their highest level since Aug. 19. Stock markets in Chile, Peru and Venezuela also rose. Only Argentina slipped among major exchanges, but its Merval index hit a 12-week high this week.

Mexico’s IPC index--the best-performing emerging-market bourse last year with a total increase of 52%--had plummeted this year from 5,229 to as low as 2,917 on Sept. 11. It has risen steadily since, gaining 0.6% on Friday to close at 4,286.94.

Continued buoyancy in Mexican consumer spending has encouraged investors to believe Mexico will resist any serious crisis. An approaching congressional agreement on Mexico’s bank bailout program from the 1995 crisis also has boosted stocks. Banking shares and retail chains were big gainers Friday.

“I believe it is not a matter of the crisis being over, but that perspectives are clearing a bit,” said Carlos Samano, director of analysis at Bancomer, Mexico’s second-largest bank. And he cautioned, “We are not expecting the market to keep rising at the same pace. It will have to take a breath and even fall a bit as people readjust their expectations.”

Analysts attributed the Latin American markets’ rise during the last month to the forging of “renewed international economic leadership,” said Lawrence Goodman, chief Latin American economist at Santander Investment Securities in New York.

U.S. congressional approval of funds for the IMF, President Clinton’s vocal support for emergency relief to emerging-market countries and the industrialized countries’ commitment to provide help have changed market psychology for the better, Goodman said.

Analyst Manning said the turnaround was also due to the confidence generated by Brazilian President Cardoso’s success so far in pushing through social security reforms, a sign that his government may finally follow through on tough measures to prune a deficit that exceeds 7.3% of economic output.

The reforms will lower the deficit by reducing the torrents of red ink caused by pension benefits that the government is liable for. It was the most significant Cardoso victory in months in his campaign to put Brazil’s finances in order.

The reforms put a limit of $1,000 on monthly pension benefits and minimum age limits of 53 years for men and 48 years for women with 30 years of service before being eligible for retirement pay.

But Goodman cautioned against undue optimism.

“Before we become extraordinarily euphoric, investors should realize that trading volumes on Latin American stock exchanges so far are quite light, which is suggestive of the idea that there isn’t a full belief in an actual rally,” he said.

Michael Hood, Latin American economist for J.P. Morgan in New York, noted that the drubbing of Latin financial markets throughout this year will inevitably filter into the “real” economies in the months ahead. The slowing U.S. economy also will hit Mexican exports in the next year, he added.

While consumption will remain strong in Mexico through the rest of this year, Hood said, the next phase “is almost certain to be deceleration.”

* DOW NEARS 9,000: Index closed its eighth straight session without a loss. C2

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Latin Revival

Latin American markets have rebounded as an International Monetary Fund bailout of Brazil overseen by Michel Camdessus nears, Brazilian President Fernando Henrique Cardoso’s pension reform plan makes headway, and the peso and retail sales gain steam in Mexico.

Mexico’s Bolsa

Friday: 4286.94

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Brazil’s Bovespa

Friday: 8214.31

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Argentina’s Merval

Friday: 493.96

Sources: Bloomberg News, Bridge