Some See Positive Signs in Latin American Turmoil
By CLIFFORD KRAUSS
BUENOS AIRES, Argentina -- With increasing signs that world
lenders are preparing to rescue Brazil from a potential financial
meltdown, Wall Street analysts say that outflows of capital are slowing
from stock markets from Mexico City to Buenos Aires.
that the region's economies and markets may not have
reached bottom yet. Corporate profits throughout Latin America are
falling, a devaluation in Venezuela may be looming and a financial collapse
in Brazil is less likely but still possible.
mutual funds have already lost $851 million, or 63
percent, of their asset value this year. Nevertheless, some say they believe
they are beginning to see the bottom.
"The panic selling
has subsided," said James Upton, Latin American
equity strategist for Credit Suisse First Boston, who cautioned that he
expected continued volatility.
a lot of risk out there," said Eduardo Cabrera, Merrill
Lynch's chief Latin America equity strategist, noting the region's continued
vulnerability. "The global situation is still turbulent, but you have big
brother finally stepping up."
of cautious optimism are based partly on the view that the
governments of Mexico, Argentina and Peru have responded smartly to
protect their currencies with timely rises in interest rates and that several
of the region's largest countries are likely to have positive growth rates
note that Chile, a traditional leader in regional economic
policy-making, last week lifted a key capital control costly to foreign
investors in another sign that Latin America would not veer from
free-market policies adopted over the last decade.
But more than
anything else, the more positive view tentatively emerging is
based on expectations that the International Monetary Fund and other
lenders will come to Brazil's rescue with an aid package that could exceed
$50 billion and that the U.S. Federal Reserve Board will soon lower
interest rates to help the U.S. and world economies.
A loosening of
U.S. monetary policy, the analysts hope, should indirectly
raise the prices of several of Latin America's lagging exports such as oil,
copper, paper and steel.
However all bets
are off, Wall Street analysts say, if Brazil's president,
Fernando Henrique Cardoso, does not win re-election as expected on
Oct. 4. They also say he must fulfill his recent promises of an aggressive
program to slash government spending and to raise taxes to relieve the
burden of a fiscal deficit that represents 7 percent of gross domestic
With a population
of 160 million and 30 percent of Latin America's total
economy, anything that happens in Brazil reverberates through the region.
"Brazil was at
the brink of a devaluation a few weeks ago, and that meant
that all emerging markets were on the brink," said Jorge Mariscal, chief
Latin American investment strategist at Goldman, Sachs. "But now all the
things the markets were clamoring for seem to be happening."
Capital is still
leaving Latin American stock markets, but analysts say the
flow is slowing. In the week ended Wednesday, Latin American mutual
funds suffered an outflow of $15.6 million, slightly better than the average
of $18.3 million a week over the last month. James Barrineau, Latin
American equity strategist at Salomon Smith Barney, said the slight
improvement came because "we've started getting hints of an aid package
Fears of financial
collapse precipitated by Russia's devaluation and debt
moratorium, followed by expectations that Brazil would avert that fate
with an international bailout, have driven Brazil's stock market on a wild
ride in the last two months.
July and early this month, the market fell by more than 50
percent, only to recover most of its losses in recent days. Then it stumbled
again Thursday and Friday for other reasons, mainly the prospects of the
collapse of a U.S. hedge fund.
The Bovespa closed
Friday at 6,711.52, down 132.83 for the day and
more than 34 percent for the year. Mariscal and several other analysts
said they expected a recession as a result of a recent doubling of interest
rates that will depress corporate profits next year.
But while Wall
Street analysts do not expect a sustained rally in Brazilian
stocks, they say that as long as Brazil does not devalue, they like the
economic prospects for much of the rest of the region, particularly
Argentina, Mexico and Chile. Wall Street analysts say continued drops in
the stock markets in all three countries should be buffered by the ready
pools of cash available from their private pension-fund systems.
A rise in Argentine
interest rates in recent months to defend the peso has
depressed auto production and construction, and is drying up consumer
and mortgage credit. Jane Heap, Latin America strategist for Deutsche
Morgan Grenfell, has lowered her estimates for Argentina's economic
growth rate from 6 percent to 4 percent this year, and from 4.5 percent to
3 percent in 1999. But she expresses hopeful optimism.
is not a recession," Ms. Heap said. "What is most important
about Argentina is that there is no way the peso's peg to the dollar will
break even in the worst-case scenario."
stocks beaten down by more than 40 percent this year,
and several Argentine companies beginning to aggressively buy back their
own shares, several analysts said they saw the potential for higher stock
prices. They cautioned, though, that any investments in emerging markets
were risky at this point. Analysts also said the Mexican economy should
grow modestly next year, despite high interest rates, even if oil prices do
not rise much.
a 10 percent drop in Mexican corporate profits this
year compared with a 4 percent drop in corporate profits in Latin
America as a whole. "However, next year, if Brazil does not devalue, 10
percent corporate earnings growth in Mexico is doable," he said.