There is some good news and some bad news, as the old joke goes. The bad news is that the situation in Brazil-the eye of the region’s financial storm-is probably going to get worse before its gets better. The good news is that there are still Latin American countries and instruments worth investing in as the region recovers from its latest bout of instability.
That, at least, was part of the message presented at LatinFinance’s Predictor 99 conference, where Wall Street’s top analysts, strategists and economists gathered to tell some 300 investors and attendees what they foresaw in the year ahead.
The picture painted in New York, though, was smeared somewhat by the unexpected floating of the Brazilian real on January 15, only about two weeks before. As Paul Rogers, a lead portfolio manager for Scudder Kemper Investments’ Brazil Fund, said: Predicting what will happen in Brazil is “like trying to forecast what the weather is going to be like in the middle of a hurricane.”
While economists and strategists disagreed over detailed solutions to Brazil’s problems, they all warned of a steep contraction for its economy, anywhere between -1.5% and -5%. The government had hoped to bring down interest rates after a devaluation at the expense of higher inflation, but it has only forced an increase in both, noted John Welch, chief economist at Paribas in New York. Most economists agreed that Brazil would have to use higher interest rates to control inflation and stabilize what is now a floating currency regime.
Foremost on panelists’ minds was also management of Brazil’s ballooning internal debt load, which has been made even heavier by attempts to quell inflation and defend the currency through high interest rates.
Yet strategists were torn over whether the government would restructure the debt or not.
Tulio Vera, global head of emerging markets fixed income research at ABN Amro in New York, noted that Brazil’s internal debt may soon represent 47% of GDP, and if it reaches the 50% mark, it will, as he put it, “explode.”
That scenario made Vera lean toward an eventual restructuring-a move that would damage the country’s internal credit standing but affect it much less externally. But other strategists were less sure about that scenario. That’s because a restructuring would have an enormous impact on the banking sector, which holds a large portion of the debt.
What’s the good news for Brazil? Well, says Neil Dougall, senior economist for Latin America at Dresdner Kleinwort Benson, the country’s trade deficit should drop considerably, although the adjustment will be fueled by a reduction in imports rather than an increase in exports, as happened in Mexico after the peso floated in 1994. João Scandiuzzi, a senior economist at Banco Pactual, explained that a devaluation and economic contraction would not rebalance Brazil’s trade disequilibrium as easily as they did in Thailand or Mexico, where exports and imports comprise a far larger portion of GDP.
Thanks to Brazil’s currency crisis, Argentina will also be badly scarred, with its economy shrinking between 2% and 4% this year, say some economists. Still, they don’t believe Argentines- whose “tolerance for pain is high indeed,” said Dougall-will give up the currency board, which pegs the local peso to the dollar and has so successfully subdued inflation.
If anything, says Javier Kulesz, head of emerging local markets research at BancBoston Robertson Stephens, Argentina will go one step farther and adopt a complete dollarization of the economy. Besides, he added, the country is in good shape on the fiscal front, since it has access to about $2.8 billion in IMF money, $7.3 billion in reserves and $3 billion in the local Letes market.
Despite the regional fallout from the Brazilian shakeup, panelists said that some Latin countries will experience positive growth this year, including Mexico, Peru and Chile. Putting a new twist on Porfirio Diaz’s attributed quote-“Poor Mexico, so far from God and so close to the United States”-head of Latin America research at BankBoston Ian Campbell said Mexico’s real advantage is that it is so far “from the Amazon and so close to Amazon.com.” For Mexico, economists’ GDP forecasts ranged from 1% to 2.5%. Still, noted panelists, the country’s links with the US also leave it vulnerable to downturns north of the border, where the ebullient stock market may eventually feel the pinch from Asia’s economic problems.
Meanwhile, Peru-with GDP growth predicted to be anywhere between 2.4% and 3.5%-has ample room for fiscal easing since it has been particularly rigorous on that front, noted Peter West, chief economist at BBV Securities.
Add to that an approaching election, plus the fact that President Alberto Fujimori’s more fiscally stringent ministers have left the cabinet, and there is even more reason to see the economy kick into a higher gear this year.
And while Chile saw GDP shrink considerably after Asia’s financial woes sent shock waves across the Pacific, economists have been impressed with its ability to battle the turmoil and meet inflation targets, although many complained that the government fiddled one too many times with the foreign exchange rate.
Ecuador remains the wildcard, with strategists’ sentiments ranging from pessimism to cautious optimism. The optimists cite the new government’s sound fiscal policy, and a possible opening up of the oil sector, which would have a significant impact on such a small economy.