MERCOSUR: Argentina Confident about Brazil’s Stability

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jul 16 1997 (IPS) - Economic analysts in Argentina expressed their confidence Wednesday that Brazil, the country’s main trading partner, would avoid a major devaluation of its currency because President Henrique Cardoso plans to stand for re- election there in 1998.

A majority of analysts here attributed the recent downward trend seen in Latin American stock exchanges to a taking of profits by foreign portfolio investors, in a market that had given them nothing but satisfaction so far this year.

Brazil’s political interests in avoiding a devaluation kept local government officials and independent observers here calm in the face of the fall in share values which followed a chain of devaluations in Southeast Asia, awaking fears of a domino effect in Brazil.

Brazil buys an annual average of six billion dollars in goods from Argentina. Some observers point to a dependency on Brazil that they say must be broken in order to keep Mercosur – Southern Common Market, also grouping Paraguay and Uruguay – from being dragged down by a crisis in the South American giant.

Analysts here said Wednesday that Brazil would avoid a devaluation for the time being, but that even if it resorted to that measure, Argentina would not suffer a major impact.

Local economist Guillermo Calvo, who predicted the crisis that broke out with Mexico’s late 1994 currency collapse, said Wall Street investors believed that “Brazil will not resort to a devaluation, because the ‘hot’ capital already pulled out, and what is left is long-term and prepared to stay, not to flee at the first peep.”

Economic analyst Jose Luis Machinea also minimised the chances of a devaluation due to the complications such a move would mean for Cardoso, who will stand for re-election, made possible by a recently passed constitutional amendment.

“A major devaluation would accelerate inflation, and that isn’t good for a president on campaign,” he underlined.

The Buenos Aires newspaper ‘Ambito Financiero’ wrote Wednesday that Argentina’s confidence was based on political assumptions: “Cardoso will justify any effort to maintain his government’s exchange policy and avoid a jump in inflation.”

For the third day running, Cardoso denied that his government was considering devaling the Real, which is held on par with the dollar.

While Brazil is Latin America’s leading economy due to the size of its market (160 million inhabitants) and its GDP, it is vulnerable today because of its current accounts deficit, which had ballooned to 15 billion dollars, or 4.19 percent of GDP, by the first half of the year.

Nevertheless, economists in Argentina agree with the Cardoso administration that the magnitude of Brazil’s foreign exchange reserves (57.6 billion dollars) make a devaluation unlikely.

Argentine Economy Minister Roque Fernandez said in the United States that his Brazilian counterpart Pedro Malan assured him last week that Brazil would not devalue its currency.

But Fernandez added that even if the Brazilian government did resort to such a measure, simulations by his ministry’s team of economists indicated that Argentina’s growth rate, forecast at six percent this year, would only drop one percent.

Argentina was especially hard hit by the “tequila effect” that followed Mexico’s late 1994 devaluation of the peso. Production here shrank by five percent in 1995.

But in 1996 it began to recover, with a healthier economy and a more solid financial system. Today most analysts say the country came out of the crisis with flying colours.

Secretary of Industry Alieto Guadagni said Brazil’s situation today was not comparable to that of Mexico in 1994, which had a current accounts deficit of eight percent of GDP, double Brazil’s current deficit.

Arturo Porzecanski, ING Barings’ chief economist for the Americas, warned at a seminar here three weeks ago that Brazil could not grow more than three percent a year without risking a devaluation of its currency. “That limit will have to be broken by a devaluation of the Real, which we do not foresee until early 1999, and which will be much more than a gradual depreciation like those produced up to now.”

Porzecanski agreed that a devaluation would be put off for political reasons. The 1998 elections provide a barrier today to an adjustment measure that could trigger runs on banks, price rises and bank crashes, at a time when Brazil is opening its economy to large direct foreign investments.