ECONOMY-LATAM: Argentina’s Neighbours Feel Relatively Safe

By Mario Osava Reprint | | Print |

Mario Osava and Gustavo González

RIO DE JANEIRO/SANTIAGO, Dec 27 2001 (IPS) - Brazil and Chile do not expect a heavy impact from the suspension of debt payments and a possible devaluation in neighbouring Argentina, although Uruguay is a bit more concerned.

The Brazilian real and the Chilean peso have both appreciated against the dollar this week – a reflection of the limited effect of the economic measures adopted by Argentina’s new interim government, which was installed after rioting, looting and protests against austerity plans toppled the government of Fernando de la Rúa last week.

In foreign exchange houses in Santiago, the Chilean peso stood at 660 to the dollar Thursday – four pesos up from the exchange rate registered Friday, the day after de la Rúa resigned.

The Brazilian real, meanwhile, stood at 2.32 to the dollar Thursday, slightly up from last week’s rate, by contrast to the devaluation seen in similar situations in the past.

The exchange rate of the Chilean peso is the most palpable evidence that the economy of Chile – an associate member of the Mercosur trade bloc made up of Argentina, Brazil, Paraguay and Uruguay – had already “internalised” the effects of Argentina’s economic crisis.

Argentina’s moratorium on foreign debt payments, announced by caretaker President Adolfo Rodríguez Saá, came as no surprise in Chile, where the government as well as the Central Bank and the business community had already implemented the necessary safeguards, according to local analysts in Santiago.

The impact of Argentina’s 41-month recession was felt most keenly in Chile last October, when the peso devalued to more than 700 against the dollar as a consequence of the activity of speculators who drove up demand for the dollar.

The speculators’ aim was to transfer dollars to Argentina, in order to benefit later from an eventual devaluation of the Argentine peso.

In January, Rodríguez Saá will launch a third currency, the ‘argentino’, in order to stage “an orderly exit” from that country’s currency board system that pegs the Argentine peso to the dollar, according to the new Finance Minister in Buenos Aires, Rodolfo Frigeri.

Frigeri told the Buenos Aires newspaper Clarín that the new currency will not be convertible, and will be at par with the dollar, although “we do not rule out the possibility that it will depreciate in time,” he added.

In the view of analysts and traders, gradual devaluation in Argentina is a given, but they say it will occur in the framework of safeguards and precautionary measures aimed at curbing speculation.

“It will take Argentina years to recover, and it will do so in a very isolated fashion, in its own world distanced from the rest of the region, which means it should not continue to influence the price of the dollar” in Chile, said one trader in Santiago.

Chile’s macroeconomic stability also prevented the Argentine crisis from having a greater effect on its economy, according to President Ricardo Lagos and his Finance Minister Nicolás Eyzaguirre.

In Brazil, meanwhile, the government and analysts believe that in the eyes of the international financial market, Brazil is safe from Argentina’s troubles.

One sign of that was the rallying of the real, the Brazilian stock market and the country’s public debt bonds since late October, when Argentina first neared the brink of collapse.

“The chief thermometer” indicating that there will be no retraction of foreign capital in Brazil is the fact that the real began to recover two months ago, even as the Argentine crisis was worsening, Fernando Ribeiro, an economist with the Brazilian Society of Studies on Transnational Corporations and Globalisation (SOBEET), told IPS.

Economists say the inflow of foreign capital to Brazil will not slow down, unlike what tends to occur in developing countries at times of crises that have a contagion effect.

The Central Bank registered the entry of 20 billion dollars in foreign direct investment from January to mid-December, with an unexpectedly strong influx in the past two months that surpassed all projections, even those of the government of Fernando Henrique Cardoso.

Brazil expects to receive at least 17 billion dollars in investment in 2002, according to SOBEET, a think-tank based in Sao Paulo.

Brazil’s four billion dollar trade surplus and the strong flow of foreign investment into private companies will enable the country to meet its external account obligations without any problems next year, despite the travails of Argentina, the other major partner in the Mercosur trade bloc.

Brazil will remain an attractive market for investors, and will have no difficulty in continuing to draw foreign investment, Carlos Geraldo Langoni, a former president of Brazil’s Central Bank, said Wednesday.

In 2002, the Brazilian economy – Latin America’s largest – will grow more than this year’s two percent, in spite of the troubles in Argentina and “the globalised world’s first recession,” predicted Langoni, who heads the Global Economy Centre of the Getulio Vargas Foundation, a Rio de Janeiro think-tank.

“I don’t think there will be a major impact” from Argentina’s moratorium, or the measures that Rodríguez Saá will take, said SOBEET’s Ribeiro. Over the past year, Brazil has already absorbed the blows dealt by the Argentine crisis, with a sharp depreciation of the real prior to the current recovery, and a consequent rise in inflation, he added.

Brazil has a sound financial system today, and many companies receive credit in the international market, said the economist.

Nevertheless, the deepening recession in Argentina will lead to a further drop, of around 20 percent, in Brazilian exports to that country in 2002, said the director of the Brazilian Association of Foreign Trade (AEB), José Augusto de Castro.

That fall will be equivalent to some one billion dollars in lost sales, which will also weaken the rest of the Mercosur. However, the reduction in sales will only represent two percent lower growth in Brazil’s exports next year, the AEB reported.

But a smaller Mercosur partner, Uruguay, will feel a stronger impact from Argentina’s economic collapse. Former economy minister Ignacio de Posadas said the steady three-year drop in Argentine demand for Uruguayan goods and services has already taken a turn for the worse. Argentina is the main market for Uruguayan exports.

But the most immediate and severe effect will be suffered by Uruguay’s tourist industry, which depends heavily on the flow of Argentines, who make up 80 percent of all visitors to Uruguay in the three months of the southern hemisphere summer and spend around 300 million dollars a year in its seaside resorts, according to local experts.

Uruguay’s beef exporters are also worried. Sales of beef, the country’s main export, plunged 40 percent this year, with losses of 140 million dollars, due to outbreaks of foot-and-mouth disease.

Beef exporters in Uruguay are concerned that Argentina, the world’s third largest beef exporter, could cut its prices to boost sales, given its desperate need for foreign exchange, with the subsequent impact on its competitors.