Analysts See Positive Signs In Latin American Turmoil (fwd)

[Robert Weissman <rob@essential.org>]

The New York Times 
September 26, 1998, Saturday, 
Section C; Page 2; Column 1; Business/Financial Desk 

INTERNATIONAL BUSINESS; Analysts See Positive Signs In Latin American 
Turmoil

By CLIFFORD KRAUSS DATELINE: BUENOS AIRES, Sept. 25

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. They caution 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. Latin 
American 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 A. Upton, Latin 
American equity strategist for
Credit Suisse First Boston, who cautioned that he expected continued 
volatility. "There's still 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." The
beginnings 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 next 
year. They 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 Federal Reserve will soon lower interest rates to help the 
United States and world economies. A
loosening of United States 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 product. 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 O. 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 for Brazil." 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 the last two months.
Between late July and the first 11 days of this month, the market fell by 
better than 50 percent, only to recover
most of its losses in recent days. Then it stumbled again Thursday and today 
for other reasons, mainly the
prospects of the collapse of an American hedge fund. The Bovespa closed 
today at 6,711.52, down 132.83 for the
day and more than 34 percent for the year. Mr. 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. "It certainly 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." With Argentine 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 did not rise much. Mr. Barrineau forecast 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.