LATIN AMERICAN NATIONS SCRAMBLE TO CONTAIN EFFECTS OF GLOBAL ECONOMIC CRISIS (fwd)

[Robert Weissman <rob@essential.org>]

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      L A T I N    A M E R I C A    D A T A    B A S E
    
              NotiSur - Latin American Affairs
    
ISSN 1060-4189      Volume 8, Number 32   September 4, 1998
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    Copyright 1998, Latin America Data Base (LADB), Latin
        American Institute, University of New Mexico
    
           Director:          Rebecca Reynolds Bannister
           Editor:                        Patricia Hynds
                         Staff writers:
                Carlos Navarro, Robert Sandels
 
                      In This Issue:
   
LATIN AMERICAN NATIONS SCRAMBLE TO CONTAIN
EFFECTS OF GLOBAL ECONOMIC CRISIS
   * IMF calls Latin Americans to Washington
   * More currency devaluations feared
   * Stock markets plunge
   * Concern that the model is not working
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       GENERAL
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LATIN AMERICAN NATIONS SCRAMBLE TO CONTAIN
EFFECTS OF GLOBAL ECONOMIC CRISIS
  
     Latin America has been particularly vulnerable to the
effects of the Russian economic crisis that has sent markets
into a tailspin around the world.  Analysts fear that, if the
situation in Russia worsens, investors could become even more
cautious about putting money into Latin America and other
emerging markets.  Amid growing jitters, the International
Monetary Fund (IMF) called Latin America's finance ministers
to Washington to strategize about the growing crisis.        
Meanwhile, some analysts are questioning the role of the
prevailing neoliberal model in the region's troubles.
     Latin America has relied on cheap international credit
over the past few years to finance budget deficits and
investment and to prop up overvalued currencies. 
Nevertheless, just a month ago many economists thought the
region could escape relatively unscathed from the effects of
the free-falling Russian economy.  Now, however, they predict
rough times ahead.
     The world is moving toward 1929 instead of the 21st
century, said Brazilian economic analyst Celso Furtado.  He
said the spread of the global-markets crisis "has made it
clear that recession is inevitable."  One possible positive
effect could be "a review of the reigning model of
development, a shift in direction."
     US analysts warn that credit could dry up altogether for
Latin American countries if Russian President Boris Yeltsin
abandons unpopular market reforms in a compromise with anti-
reform leaders in parliament.
     "Anybody who buys Latin debt right now is going to be
much poorer in the next few months," said Joe Petry, head of
Latin American sovereign analysis at Citicorp Securities. 
"Russia has proven that sovereign default is back on the table
as a policy option and that the IMF cannot be counted on as a
safety net."
     Russia's problems are a greater threat to Latin America
than were the Asian ills, and any serious problems in Latin
America will be felt in the US.  The US sells 21% of its
exports to Latin American countries, compared with 14% to Asia
and a much smaller amount to Russia.
     Venezuela, Brazil, and Argentina are the Latin American
countries most vulnerable to the turmoil.  The Venezuelan
bolivar has been under attack amid speculation the country
will devalue the currency.   Like Russia, Venezuela has been
hit by a sharp decline in world oil prices (see other article
in this edition).  A collapse of the bolivar could undermine
the Brazilian real and other currencies.
     "This is something to get worried about," said David
Wyss, chief financial economist for DRI McGraw Hill, a
forecasting firm.  "These countries are hurting because
commodity prices are down," Wyss said.  "Their economies are
in better shape than they were in the 1980s--substantial
foreign currency reserves, currencies in good shape--but a
crisis still could be painful."
     
IMF calls Latin Americans to Washington
     IMF officials met Aug. 28 to examine Russia's economic
decline and how to salvage the US$23 billion international
bailout.  At the same time, IMF director Michel Camdessus
invited Latin America's finance ministers and central bank
officers to Washington Sept. 3-4 to discuss the crisis. 
Camdessus proposed that the officials try to reach a
coordinated response to "shore up investors' confidence."
     Some Latin American economists said the region was in
better shape to resist the latest turbulence than during the
Mexican peso crisis that began in late 1994 and that the IMF
meeting was unnecessary.  That view changed on Sept. 2 when
Colombia announced a de facto devaluation, which analysts
called the first significant change in any Latin American
country's exchange-rate policy since Asia's financial crisis
began last year.
     
More currency devaluations feared
     Colombia announced it would allow the peso to drop by a
maximum of 26.6% against the dollar in 1998, compared with a
previous maximum of 16%.  The surprise move was expected to
increase pressure on Venezuela and Ecuador to follow suit. 
Other regional currencies were also under pressure.  Mexico's
peso tumbled to a historic low despite central bank efforts to
prop it up.  The government also placed restrictions on the
money in circulation (see Sourcemex, 09/02/98).
     Argentine President Carlos Menem froze public spending on
Sept. 1 to reduce the impact of the crisis.  Brazil, estimated
to have lost US$9 billion in foreign currency reserves this
month, made loans converted into direct investment and fixed-
income funds tax-exempt.  The central bank had already
authorized advance expiration of loans and greater flexibility
for attracting foreign capital.
     If Brazil were to devalue its currency, Argentina--
because of economic and trade relations--would suffer the
greatest negative impact, but the rest of the region would
also be affected.  Brazil's huge deficit and regulated
currency-exchange market make it attractive to speculators.
     
Stock markets plunge
     Since the beginning of the year, the major Latin American
stock markets have fallen sharply.  The Bovespa in Sao Paulo
is down to a 20-month low, the Mervel index in Argentina is at
a 34-month low, while in Mexico the IBC index is down 47% this
year.  Worst hit so far is the Venezuelan market, down 63%
this year.
     In mid-August, rumors of a Venezuelan devaluation, denied
by the central bank, sent its market into a tailspin--losing
22% in a week.  Brazil fell 11%, and Mexico 10% in sympathy.
     The recent selloffs have increased fears that investors
will withdraw from all emerging markets.
     David Bain, senior economist at Schroder Investment
Management Ltd., said the Asian and Russian turmoil had made
Latin America a new uncertain area for foreign fund managers.
     "We begin to see cracks in some Latin American countries
like Venezuela and Brazil," said Bain.  "I think Latin America
is more a concern than Russia."
     World Bank chief economist for Latin America Guillermo
Perry was among the few untroubled by the crisis in Latin
America.
     "This time there was a drop in stock market prices, an
increase in spreads, a reduction of Brady bond prices, and
there has been some outflows of capital, but this was
compensated to a large extent by the very strong influx of
long-term capital in foreign investment and in
privatizations," Perry said.
     "Pressures on the currencies have been moderate, and
there have been increases in domestic interest rates, but not
very substantial and much less than what was needed in
October," Perry said.  He said both Venezuela and Brazil have
a "very comfortable level" of reserves and should have no
trouble in meeting foreign payment obligations.
     
Concern that the model is not working
     Accentuating Latin America's vulnerability to global
fluctuations are its dependence on foreign investment,
political instability despite the preponderance of
"democratic" governments, and huge trade deficits.
     In many countries the percentage of market shares held by
foreigners is growing--in Mexico it is now one-third. 
Development is also highly dependent on foreign capital,
increasing the impact from any skittishness by investors.
     Both Venezuela and Brazil have elections this fall,
following recent balloting in Ecuador, Colombia, and Paraguay. 
Opposition to privatization, frustration at high unemployment,
and growing discontent by those "excluded" from the economic
process have been issues throughout the region.
     Trade deficits have increased as commodity prices have
fallen.  Drops in oil prices have hit Venezuela and Ecuador,
while the fall in copper prices has been a blow to Chile.
     The worsening world financial situation is once again
raising questions about causes and remedies, states the latest
Bank for International Settlements (BIS) report.
     The BIS, a sort of world central bank based in Basel,
Switzerland, generally follows neoliberal economic thinking. 
Although neoliberal guidelines oppose controls, the BIS says
recent events underline the need to reconsider the
"architecture" of the world financial system, which is
increasingly beyond the reach of national regulatory powers.
     The financial meltdown questions the benefits of
"unbridled" capitalism and its suitability for developing
countries undergoing economic turmoil, said the BIS.  The IMF
has already been criticized for applying rigid policies to
economies suffering large capital outflows.  Increasingly,
economists are arguing that IMF-defined capitalism may not be
suitable for all countries.
     "The raison d'etre of governments everywhere is their
ability to protect citizens from insecurity," said John Gray
of the London School of Economics.  "A regime of global
laissez-faire that prevents governments from providing this
protection is creating conditions for still greater political
and economic instability."
     Critics say global capitalism has taken on the trappings
of a casino, with investors rapidly shifting funds around the
globe to profit from the latest crisis or escape its
consequences.  They question whether free markets are worth
holding on to at all costs if they breed turmoil and economic
insecurity for a country's citizens.
     "As difficult as it may be for me to accept, some form of
capital controls may become necessary for many of these
economies," said one European monetary official.
     Nevertheless, within institutions like the IMF, any call
for restrictions on the flow of capital will likely be seen as
a step backward in the development of emerging economies.
     Meanwhile, the world is entering the second phase of the
financial crisis, "the worst part," said Hernan Cortes,
foreign adviser to Chile's Finance Ministry.  What can be
expected now is a slowdown in growth and an increase in
inflation, unemployment, and "the discontent of the citizenry,
which will give rise to new political pressures."  [Sources:
BBC, 08/25/98; Associated Press, 08/27/98, 08/28/98; Notimex,
08/17/98, 08/29/98, 08/30/98; Inter Press Service, 08/28/98,
08/30/98; Reuters, 08/27/98, 08/28/98, 08/31-09/03/98;
PRNewswire, Spanish news service EFE, 08/31/98]