LATIN AMERICA: Asian Breezes Cool off Economy

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Mar 19 1998 (IPS) - Fallout from the Asian crisis will bring reduced investor confidence, a slump in exports, uncertainty in financing and a drop in the prices of commodities, which will add up to a cooling off of Latin America’s regional economy this year, SELA forecast Thursday in a new report released in Venezuela.

Economic growth will be 1.6 percent lower than initially projected, the Latin American Economic System (SELA) predicted in a report on the regional impact of the crisis that broke out in southeast Asia in July.

The study says that although Chile has all the elements to make it the country hardest hit by the Asian crisis, among the seven analysed, its financial solidity and the high level of credibility of its economic policy make it less vulnerable to turmoil than the others.

SELA, comprised of 27 Latin American and Caribbean nations, reached the conclusion that Argentina, Brazil and Peru were in the weakest position with respect to the crisis.

The fragility of the first two is mainly the result of their strong need for funding for new projects and for rescheduling their foreign debt, and, in the case of Brazil, macroeconomic imbalances that a special plan launched Nov. 10 was designed to correct.

Colombia, Chile, Mexico and Venezuela, the other countries considered, show less vulnerability.

The three South American countries will mainly be affected by the slump in the prices of commodities, while in the case of Chile there is an additional factor – it is the Latin American nation with the closest commercial ties to Asia. The report adds that Mexico’s weakness does not arise from any specific sector.

The regional body analysed the direct or indirect short-term costs of the fallout, but warned that the longer-term effects could be just as signficiant as the most immediate ones, due to globalisation and the risk that industrialised economies could slow down more than expected, and may fail to address the “systemic risks” plaguing their financial sectors.

Although the crisis had an impact on Latin America’s leading stock markets in 1997, it did not affect the economy, which grew five percent, the best performance seen in the past quarter century.

But the prolongation and deepening of the Asian crisis bode ill for the region, due to the multiple and growing channels of transmission towards Latin America.

SELA points out that in January, multilateral agencies corrected projections for growth in the region to a provisional figure of 3.5 percent, 1.6 percent lower than earlier predictions.

The worst economic impact will be global in character. But emerging economies like those of Latin America will also suffer effects such as an immediate and generalised crisis of confidence in the wake of any episode in just one or a few countries.

SELA said the phenomenon known as “search for quality” gave rise to a domino effect of sliding investment and higher cost of financing in emerging countries, which was added to the more direct economic impact.

Using an econometric analysis similar to that employed by credit-rating agencies, the SELA study found four groups in terms of financial risk with respect to the turmoil triggered by the Asian crisis.

The first group, the least jeopardised countries given their monetary strength and financial balance, encompasses Chile in Latin America and Malaysia, Hong Kong and Taiwan in Asia.

The second group is made up of relatively solid economies, which are nevertheless vulnerable due to potential imbalance in trade and high indebtedness: China, India, Argentina, Mexico, Venezuela and Uruguay (although this last was not studied by SELA).

The third group includes the countries at the epicentre of the crisis (with the exception of Malaysia): Thailand, Indonesia, South Korea and the Philippines.

The last is comprised of Brazil, Colombia and Peru, and characterised by macroeconomic imbalance and potential financial volatility.

The region’s commercial dependence on Asia is manageable, given that Asia buys only 10.27 percent of Latin America’s total exports. But the dependence is higher in the case of Chile, a full 38.7 percent of whose sales went to that region in 1997, followed by Peru (25.33 percent), Brazil (15.28 percent) and Argentina (14.99 percent).

But the crisis had a greater impact on Latin America due to the strategy followed by many countries in the region designed to make inroads into Asia, which the report says “significantly accelerated” sales to that region in the first eight months of 1997.

Although the prices of commodities began to slump back in 1996, the Asian crisis sped up and aggravated the tendency, which had an especially strong impact on copper, Chile’s main export, and oil, on which Venezuela is particularly dependent, followed by Mexico and Colombia.

Latin America successfully reduced its financial dependence on “hot” capital flows this decade, and by 1997, direct investment accounted for 44 billion dollars of a total 73 billion in foreign investment.

But the Asian crisis led large firms from Japan and South Korea to postpone investment plans in the region, part of a generalised slump in capital flows to emerging countries.

Even more serious, according to SELA, was the difficulty of access to the international market of Euro-bonds this year, after Latin American nations made 53 billion dollars in gross emissions in that market in 1997.

Several emissions had to be postponed, but even worse was the sharp increase in risk premiums which averaged 165 percent for emerging countries in the Euro-market in January, and a full 204 percent for Brazil and 197 percent for Argentina. The rise was lower than average in the rest of the region, SELA reported.