Prospects for Latin America economy recovery looks bleaker than ever

Sep 12, 2001 02:00 AM

The prospects for recovery in Latin America's key economies look bleaker than ever following the terrorist attacks on the US Argentina, Brazil and Mexico have posted dismal growth numbers so far this year as a result of a deteriorating global economic outlook and an array of home-grown problems. Now, as a deeper economic malaise looms in the US and investors turn to traditional safe havens amid the financial turmoil that's expected to prevail in the near term, Latin America is vulnerable, analysts say.
"We all agree that we can expect weaker currencies, higher interest rates and scarcer capital flows, and everything that goes along with that," said Chip Brown, head of fixed income and economics research at Santander Central Hispano in New York. "We are relatively sure (the crisis is) going to degrade growth" in Latin America, he added. "But I think it's way too soon to say by how much. It depends on how the US responds" to the attacks.

Analysts have been gradually trimming their economic growth forecasts for the region throughout the year. BBVA Securities sliced its projection for the region to 1 %, down from 4 % at the start of the year.
Even before the uncertainty created by the attacks on US financial and government institutions, economists pointed to the negative impact of the US slowdown on the region's trade accounts and reduced capital flows amid heightened investor risk aversion toward emerging markets. Those trends will likely be exacerbated going forward, economists now say.
"Latin America was sitting on the fence anyway in terms of its recovery. This might be the push that could keep it from making a full-scale recovery," said Miguel Diaz, director of the South America project at the Washington DC-based Centre for Strategic and International Studies.

Investor sentiment toward Latin America has eroded this year in large part as a result of concerns that Argentina could be forced to restructure its massive debt load after three years of recession. Some of the market anxiety had subsided in recent weeks after the International Monetary Fund authorized $ 8 bn in fresh cash for the country and plans got underway for a possible voluntary debt swap.
The events in the US, however, could quickly squash any budding optimism. "Of course Argentina is seen as a high risk investment. Should (the attacks) have any impact on risk aversion, that of course will not" play well for Argentina, said Freddy Thomsen, economist at ING Barings in Buenos Aires. Argentina has filled its financing gap for the near term, he noted. "But Argentina wanted to turn the mood around and get the economy going and start 2002 on a different path. Now that is thrown into doubt."
And with the US in crisis, analysts noted that Washington DC may not be able to be as attentive to the financial difficulties facing Argentina and other countries. Brazil, which has suffered the brunt of Argentine contagion this year, also looks shaky going forward.

Since the attacks, the Brazilian real hit a new all-time low of around BRR 2.70 per dollar. Analysts say the currency weakness and resulting inflationary pressure make it highly unlikely the central bank will be in a position to lower rates in the coming weeks, despite the deteriorating growth scenario facing the country.
Brazilian President Fernando Henrique Cardoso said that the country will be "directly or indirectly" affected by the turbulence affecting the world economy as a result of the attacks in the US. Before this tragedy, Brazilian growth projections for 2001 had been cut to less than half the originally-expected 4.5 % rate. Aside from Argentine spill over, the country is suffering the effects of an unprecedented energy crisis and political concerns.

Mexico, the biggest economy in Latin America, stands to suffer mostly as a result of its close trade ties to the US, the destination of more than 80 % of its exports. Despite a sluggish economic environment, Mexican financial assets have performed well this year as the country is considered relativelyinsulated from the troubles plaguing Argentina and Brazil.
Since the attacks, however, the peso has weakened more than 25 centavos to around MXN 9.50 per dollar. "Given that the US is going to suffer directly from this, and that Mexico is so closely tied, Mexico will not shine as a safe haven option," said CSIS's Diaz.
Elsewhere in the region, Venezuela is particularly vulnerable to a potential reduction in demand for oil in the US, which accounts for about half of the country's oil revenues, or around a quarter of total government income. Colombia and Ecuador could also suffer from a slowdown in demand for oil. By the same token, an increase in global oil prices in the event of a Middle Rast crisis -- because of a retaliatory US attack on countries in the region, or the threat of such an attack -- could be a boon for the accounts of those

Meanwhile for Peru, a net oil importer, "Obviously the events in the United States will affect our exports, since we are a small open economy," deputy finance minister Patricia Teullet was quoted as saying. Chilean Finance Minister Nicolas Eyzaguirre said that Chile has the "image and the instruments" to react to whatever repercussions these attacks could have on the economy. However, "this does not mean we are not immune," said Eyzaguirre, adding that a few decimal points could be shaved off Chile's economic growth rate.

Source: Dow Jones
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