Latin Markets show
underlying strength
The region's financial markets appear to have come through the Russian & Asian crisis without major disasters. Currency pegs have held, debts have been serviced and capital has flowed in as well as out.
The devaluation of the Colombian peso was well signalled and initially, at least, well handled. Indeed the day after the devaluation, the peso traded in a very narrow range.
Furthermore, the devaluation in Colombia did not immediately trigger
a devaluation in Venezuela where the economic problems are compounded
by political uncertainty over the presidential elections. Along
with Ecuador, Venezuela looks to be in the most danger of following
Russia down the path towards a moratorium on debt payments: the
prices of both
countries' secondary market debt clearly signals this risk.
The Brazilian stockmarket (and the Brady market) had a horrible
time but it continued to operate. At the beginning of September
government felt confident enough to cut interest rates by a token
0.75 percent, as if to demonstrate that it was determined that
the international financial turmoil should not upset its plans
to stimulate the domestic economy.
Although analysts have speculated that the Real might be devalued,
the central bank does not appear to have been under intolerable
pressure. Even after the outflows (of over US$12B in August) the
central bank still has reserves which are worth over a year's
imports.
The size of the capital outflows in August puts the traditional
(import cover) measure of solidity into perspective. Brazil's
reserves may be a year's worth of imports but they are only five
months' worth of August's outflows. In a crisis, as Mexico learned
in 1995, apparently solid foreign reserves can evaporate in less
than a month.
Argentina, too, has come through the `Vodka crisis' without too
much difficulty. Its problems clearly lie in the future: there
are already signs that the IMF's patience with the government's
foot-dragging over tax and labour reform is beginning to wear
thin.
Chile, along with Brazil, has tinkered with its exchange controls
in order to stimulate capital inflows to cover its current account
deficit. Easing capital controls when markets are choppy is a
brave policy. It does, however, demonstrate a commitment to free
markets.
Mexico's financial markets have been arguably the most battered
by the crisis. Interest rates have shot up and the peso has sagged
through 10.1 to the dollar despite the frantic efforts of the
central bank to drain liquidity from the domestic money markets.
The stockmarket is hovering around 3,000.
The irony is that the real economy is still growing strongly and
the balance of payments is under control. There are signs however,
that Mexico may be entering a rocky period. Exports failed to
grow - the first time in six years. If, as some economists expect,
the US economy starts to slow sharply following the stockmarket
slide, Mexican exporters could find the going harder.
The one constant theme running through regional policy makers'
response to the financial crisis in September, is that eventually
the markets will stabilise. This confidence is admirable. The
dangerous question is what will policy makers do, if in three
or six months' time emerging markets are still being battered?
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