Latin Markets Closely Tied to U.S. Economy
Wall Street tremors have shaken Latin America’s markets, proving once again that the increasing integration of the hemisphere cuts both ways.
As the U.S. economy has continued to falter, much of Latin America has been hurt because markets are to some degree or another dependent on the United States. Falling economies here have hurt trade with the U.S.
But the amount of pain depends on the size of the markets. Large economies such as Argentina and Brazil are sharply down, while the smaller exchanges such as Costa Rica and Jamaica are up for the year.
Nowhere is the U.S. economic outlook more scrutinized than in Mexico, which sends one-quarter of its gross national product north. Although the long-term view of Mexico remains bullish among most economists, markets could be in for rough sledding in coming weeks if the U.S. economic news fails to brighten.
“The issue of today is there are new doubts about a U.S. recovery and nothing else matters at the moment for Mexico. Tax reform will matter later in the year but not now in investors’ eyes,” said Geoffrey Dennis, Latin American equity strategist at Salomon Smith Barney in New York.
Mexico’s Bolsa index inched up 0.2% on Monday, after losing 7.4% last week. The Mexican peso, however, has weakened. Economists here have been steadily revising growth targets downward as the U.S. economy has slowed.
The Bolsa is up 3.6% for the year--but was up 25% in early August, said Damian Fraser with UBS Warburg in Mexico City, before persistent U.S. sluggishness forced investors to see Mexico’s economic glass was half-empty instead of half-full. Through early August, Mexico’s market seemed to shrug off bad news, buoyed by a flood of foreign investment dollars and growing levels of remittances from Mexicans living in the United States, a sum expected to exceed $8 billion this year.
Interest rates and inflation have headed down this year, giving investors confidence. So did what Fraser called the “financial convergence” of Mexico with the United States, exemplified by the Citibank purchase of the parent of Banamex, this nation’s largest independent bank.
But the passing weeks have exposed a troubled Mexican economy that had three quarters of recession and which through July had seen the loss of 456,000 jobs--3% of its job base--since President Vicente Fox took office in December. Continued jobs losses could create social as well as economic problems.
Although the strong peso and wage gains above the rate of inflation have kept consumption high in Mexico over the first half of the year, signs are that consumers are finally staying away from the stores. Grupo Banamex expects private consumption to slow to just 3.8% for 2001 after growing 9.5% last year. The consequences of the slowing economy have taken their toll on stocks, in what Fraser said has been market overreaction. “Mexico wasn’t so great when it was up 25%, and it’s not that bad now,” he said.
The Brazilian economy also has darkened because of falling demand in the United States for its exports, problems with neighbor and principal trading partner Argentina and its own energy crisis, which has hurt industrial production and consumer confidence. Brazil’s economy will be lucky to grow 2% this year after starting out the year with a 4.5% growth target, the same as last year’s rate.
The main Brazilian stock index, the Bovespa, has lost nearly 22% this year, including a 4.6% drop last week. It fell 2.7% on Monday. Its troubled currency, the real, continued to slide, closing at 2.6 to the dollar, an all-time low.
“The economy is not doing great, although it is doing better than any other economy in the region,” said Mario Mesquita of Latin America ABN Amro in Sao Paulo, Brazil. He added that the currency devaluation is having the desired effect of an improved balance of trade, now that imports have become expensive and domestic industry is on a better competitive footing.
Argentina is this year’s basket case, with the Merval stock index having lost 31.1% this year. A recent assistance package totaling $8 billion from the International Monetary Fund has not convinced investors that Argentina will be able to avoid debt default or currency devaluation.
As a result, Argentine bonds pay interest that is 14 percentage points or more above what comparable U.S. bonds pay, despite the IMF package, a measure of the “country risk” investors face there.
“No one views the IMF bailout as a sustainable solution in itself,” said Siobhan Manning, a debt analyst with Caboto investment bankers in New York. “And the rest of Latin America is still susceptible to what’s going on in Argentina.”
Mesquita of ABN Amro was more optimistic, saying his firm believes that Argentina will “scrape by without a default or devaluation . . . but we do not expect nervousness to end in the next month.”
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