ECONOMY-LATAM: Jitters Grow as Currencies Depreciate

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jun 27 2002 (IPS) - The steady depreciation of local currencies in Latin America with relation to the dollar is fuelling the insecurity of a region already unnerved by Argentina’s agony.

Brazil’s currency, the real, created in 1994 to put an end to three decades of high inflation, hit its lowest value Wednesday, closing at 2.8 against the dollar.

The 2.2 percent drop from the day before was mainly attributed to the heavy demand for dollars triggered by the WorldCom fraud scandal over misstated accounting figures in the U.S. telecoms giant, that concealed 3.8 billion dollars in expenses.

While such scandals affect the entire world, they spawn exchange market fears of heightened difficulties for companies in developing countries to draw investment.

Also contributing to the jitters was the news that the Brazilian government of Fernando Henrique Cardoso plans to raise next year’s inflation target, now set at 3.25 percent, with a tolerance margin of two percent.

Brazil’s country risk rating – the risk of a cessation of payments, according to investor perception – rose once again, to 1,700 points, putting this country second in the world, after Argentina.

The turmoil has been attributed to the real possibility of a triumph by leftist Workers’ Party (PT) candidate Luiz Inacio Lula da Silva in the Oct 6 presidential elections.

The real has already lost 17.72 percent of its value against the dollar so far this year, despite the fact that Finance Minister Pedro Malán and Central Bank president Arminio Fraga maintained that the country had sound economic fundamentals and the resources needed to ward off speculative attacks.

Last week’s disbursement of a 10 billion dollar International Monetary Fund (IMF) loan to Brazil was not sufficient to calm market fears.

Nor was Lula’s pledge that if he becomes president, he will honour the country’s foreign debt obligations, live up to the terms of all agreements with the IMF, and maintain the strict fiscal targets set by the Cardoso administration.

Meanwhile, in Argentina the peso is already trading at 3.95 to the dollar, and even broke through the psychological barrier of four to the dollar at one point on Wednesday.

The Argentine peso has steadily lost value since January, when the “convertibility” law, which created the currency board that fixed the peso at one-to-one with the dollar for 11 years, was abolished.

The peso continues to collapse, while negotiations drag on with the IMF, which has repeatedly refused to grant the loans requested by the government of Eduardo Duhalde.

Financial aid from the IMF would allow Argentina to resume the servicing of its debt – it declared itself in default when the current crisis broke out in December – avoid a return to the much- feared runaway inflation, and somewhat improve the performance of its economy after four years of recession, which plunged over 50 percent of the population of what was long Latin America’s richest country into poverty.

Argentina’s collapse and the turbulence in Brazil have also contaminated other currencies and economies, according to analysts.

In Chile, the dollar cost 697.20 pesos Tuesday, 50 pesos up from the early June rate. The origins of the nervousness in that Southern Cone country lie in the perturbation in Brazil, which has been “exaggerated” due to the election campaign, said Chilean Economy Minister Jorge Rodríguez.

Valentin Carril, an analyst with Celfin, a consultancy, concurred with Rodríguez that the Chilean peso would rally after the October elections in Brazil.

Uruguay was also forced last week to scrap the currency trading band that it adopted in the early 1990s.

On top of its own four-year recession, Uruguay was thus forced to let its currency float freely, and the peso depreciated 7.6 percent against the dollar in the first week.

However, the turmoil could be heightened even further in Latin America if Lula wins the elections, and the markets remain nervous about a leftist government in Latin America’s largest country. Opinion polls invariably show the PT candidate far ahead of his nearest rival.

The effects of the turbulence have already extended beyond South America, to Mexico, where the local currency is also losing value, closing at 10.10 pesos to the dollar Wednesday.

But the instability of the Mexican peso is not as serious as some would have it, according to the Central Bank and respected economist Enrique Quintana.

The Mexican peso has depreciated only three percent with respect to the dollar in the past 18 months, after a long period of a strong currency, which was beginning to hurt exports.

In times of turmoil, the peso’s value can swing even more than that, “without that bringing major upsets to the economy,” wrote Quintana in a column for the daily Reforma.

Fears of a more widespread, profound crisis in Latin America, however, also focus on other factors, such as the recession in Paraguay and Uruguay, which have been hit hard by the Argentine debacle, and the political tumult shaking Colombia, Peru, Venezuela and Paraguay.

The Brazilian Society of Research on Transnational Corporations says the flight of capital from Brazil is not a result of the pressure on the currency caused by fears of a Lula victory in October, but a consequence of the global liquidity crisis.

A study by that thinktank, financed by international banks and corporations, states that the slump in capital flows to the developing world is due to the losses and indebtedness faced by rich countries, especially the United States.

The thinktank pointed to the 13.64 percent fall on the New York stock exchange in the past 12 months, and to the 40 percent drop on the Nasdaq index.