America Is Buffeted, but Seems Stronger
Than in '94
By JULIA PRESTON
MEXICO CITY -- The demons of financial crisis are haunting Latin
America again, unleashed by tumult in Russia, Japan and now the
United States. Markets and currencies across the continent are sinking as
panicky investors retreat to the safe haven of U.S. treasury bonds and
Most of the major
Latin economies are far better fortified to withstand the
external battering than they were four years ago, when a disastrous
devaluation in Mexico engulfed several Latin American economies into
what economists, investors and politicians called the tequila effect. Since
then Mexico and Brazil have taken sober measures to build foreign
reserves and control inflation while Argentina and Chile persevered in
tough programs already in place.
Among the big
players, only Venezuela failed to buckle down to austerity
and now is paying the price in a full-blown emergency, with reserves
dropping, short-term bank interest rates soaring to 120 percent and the
stock market off 37 percent this month.
Since most of
the underlying economies are solid, the market turmoil
might have a milder effect in Latin America than alarming appearances at
the moment augur, economists and analysts said. But they cautioned that if
markets outside the region continue to dive for long, or if investors flee the
emerging markets en masse without regard to the strengths of individual
countries, the outcome could be devastating.
And if the U.S.
market slide results in a sluggish U.S. economy, the
damage will be even greater in Latin America, which sends most of its
exports to the United States.
As if to prove
the point, on a day when the Dow Jones Industrial Average
plummeted 512.61 points, or 6.37 percent, the Mexican stock market
was down 5.14 percent. Mexico canceled a regular Monday auction of
government treasury bills, known as CETEs, saying that "the offers
received were not consistent with the macroeconomic situation of the
country." It was the first time the auction was canceled since the grim days
in the wake of the 1994 devaluation.
The leading index
of Brazilian stocks was off by 4.06 percent. Even the
stock market in stolid Chile was off 3.01 per cent. Venezuela,
surprisingly, was not hit, with its stock market in a modest rally of .18
is the good neighbor in a bad neighborhood," said Riordan
Roett, director of the Western Hemisphere program at Johns Hopkins
University in Washington, D.C. The region's countries "should not be
affected, but they will be," he said.
a top economist at the Instituto Tecnologico
Autonomo de Mexico, said, "Nobody has any really perfect defenses.
This is the challenge of the smaller economies in a globalized world."
In 1994, the
region's problems were largely self-inflicted, and the United
States, then growing robustly, and the International Monetary Fund were
ready to step in with loans to help. Now Latin America is paying for
mistakes made in Moscow and Tokyo, which rattled the markets and also
sent prices for many key Latin commodities, like wheat and oil, to their
lowest real rates in decades. And neither the United States nor the
cash-strapped IMF can do much to rescue any country here.
Mexico has done
the most to clean up since 1994. Although the peso has
slipped (it recovered slightly Monday to 10.02 cents, up .4 percent), most
analysts believe it is fairly valued. Oil revenues make up 37 percent of the
government's income, and President Ernesto Zedillo responded quickly to
the drop in petroleum prices by slashing the federal budget three times,
maintaining a modest deficit of about 1.25 per cent of the gross domestic
boomed in the first half of the year, is expected to slow
through next year but remain healthy. The government is still promising
growth of more than 5 per cent this year, but economists have revised
their estimates down to 4 percent to a low of 2.3 percent, by
Bursametrica Management in Mexico City.
climbed Monday to 38 percent for the overnight Cete. But
after the drubbing that Mexican banks and indebted citizens took in 1994,
far fewer loans are out there now. Foreign reserves have remained at
record highs, with the influx of long-term investment in factories and
infrastructure, which now accounts for about 70 percent of all foreign
investment, helping to keep them there.
weak spot is its ailing banking system. The national
Congress, which will open a new session next week, remains angrily
divided about how to pay for an multibillion dollar bank bailout. On
Sunday, 3 million Mexicans turned out to vote against the government's
proposal in a symbolic referendum organized by an opposition party, the
Party of the Democratic Revolution.
"This is very
far from classifying as a crisis," said Jonathan Heath, an
economist with LatinSource Mexico. "There is a lot of noise, a
psychological crisis. But while the financial markets are reflecting what is
happening in the rest of the world, the real economy continues to grow."
factors are central. At the outset of the Asian financial
crisis last October, Brazil President Fernando Henrique Cardoso
marshaled through a package of reforms that doubled interest rates and
imposed steep tax increases and spending cuts. But the fiscal deficit
remains at nearly 7 percent of the economy. The Brazilian currency, called
the real, is traded within a fixed band and is said by analysts to be
overvalued by at least 10 percent. The Central Bank said that $7.7 billion
left the country in the four weeks before Aug. 28.
But Cardoso appears
to determined to forestall any devaluation and even
cut interest rates, at least until after the Oct. 4 elections. Polls show that
he is likely to win a second four-year term easily in the first round. Brazil
has huge foreign reserves of about $72 billion, and several valuable
government properties to sell in a crunch.
"We are going
to face this crisis, as always, calmly without any new
package, without any scares," Cardoso told reporters in a brief
the most severe problems, analysts say, primarily
because neither of the two most prominent candidates in presidential
elections in December hold much promise of bringing tough solutions to a
wayward economy. The front-runner, Hugo Chavez, 44, is running on a
populist platform of broadside repudiation of the country's political elite
for years of economic instability.
is a former Miss Universe, Irene Saez, who is 36 and
has no experience in economics.
done little to reduce its dependence on petroleum, which
accounts for three-quarters of all exports.
In the longer
term, economists are worried that investors' confidence will
be so shattered by a new round of losses in the emerging markets that
Latin countries will have trouble returning to the international markets for
help to pay their debts next year.
"It may be a
long time before investors can differentiate and say that Brazil
is different from Russia. We could be in for a period when nobody is
willing to touch the emerging markets," said Sylvia Maxfield, an emerging
markets strategist at Lehman Brothers.