BUENOS AIRES (Reuters) -- The devaluation of Brazil's real currency has
left Latin America facing its worst recession since the debt crisis of the
1980s, and economists warn the region's trial by fire is not over yet.
A slide of more than 40 percent in the real since it was allowed to float
weeks ago has been a stark reminder of the debt defaults, hyperinflation and
economic mismanagement that led to the "lost decade" of stagnation in many
Latin American countries in the 1980s.
Tulio Vera, head of emerging markets fixed income research at ABN
AMRO, predicts a 0.6 percent drop in output for all of Latin America this
He estimates the last time there was a recession of such magnitude in the
region was in 1983, when output contracted 2.6 percent. "That tells you it
all, right there," he said of the size of the coming downturn.
Other economists and banks, such as SG Cowen Securities which sees a
1.4 percent regional contraction this year, are even more pessimistic and
nearly all caution that forecasts are likely to be downgraded if the situation in
Brazil, the region's largest economy, deteriorates.
"The last few years have taught us a few things about growth expectations
the aftermath of a major currency weakening. Almost without exception, the
market has initially underestimated the downside," finance house Salomon
Smith Barney said in a research note. "Should we expect any better
performance for Brazil?"
So far, the most negative forecasters see Brazil's economy contracting
around 7 percent this year, after growing around 1 percent last year.
But the country's situation has the potential to turn much uglier if its
dives further, if there is a debt restructuring, a surge in inflation, more fiscal
deterioration or a combination of these. So the impact on the whole region
through loss of investor confidence and higher rates could still become much
worse, economists warn.
"The economic fate of Brazil and the region for 1999 hangs on how
(Brazilian) macroeconomic stabilisation pans out," SG Cowen Securities said
in a research note last week.
Unlike the 1995 "Tequila crisis" following Mexico's devaluation, when only
two of the region's major economies -- Mexico and Argentina -- contracted,
this time three are seen tipping into recession -- Brazil, Argentina and
Argentina's economy could contract about 2 percent in 1999 after growing
4.5 percent last year, while oil-dependent Venezuela is seen contracting 1.8
percent, deepening its 0.5 percent decline last year on continued low oil
Brazil saved Latin America from a regional recession in 1995 thanks to
growth of 4.2 percent linked to the then newly-introduced inflation busting
This time around, Mexico is seen scraping by with growth of about 2
percent, after recording 4.6 percent growth in 1998, as it continues to
benefit from close links to the booming U.S. economy. Chile is also seen
growing about 2 percent this year.
Even if 1999 will see one of the worst recessions on record for Latin
America, analysts say the region's governments will not turn their backs on
the sweeping free market reforms of the 1990s, which took such effort to
Governments across the region have spent the last year cutting spending
hiking rates to try to ward off the emerging market crisis that started in Asia.
Even now that it has hit, they are still trying to strengthen their economies.
In Venezuela, the former populist President-elect Hugo Chavez wants to
overhaul the constitution to allow him to push forward long-overdue
And Argentina's government has shown its determination to avoid more
fall-out from Brazil by saying it is willing to take the drastic step of dollarizing
its economy to remove all risk of devaluation.
"Latin America has shown a willingness to adjust. There is an adjustment
process taking place, like this dollarization proposal from Argentina," said
ABN AMRO's Vera. "Eventually they will come out of this crisis with
improved payments facilities."
Copyright 1999 Reuters.