Risk shifting from Argentina to Brazil

Fernando Luque 24.06.2002
Brazil, which will have a general election in October, has become the main focus of concern for investors in Latin America.

Investor sentiment

May was a bad month for all the region’s markets with the MSCI Latin America falling by just over 8% in dollar terms. It should be no surprise that Argentina, which is still anxiously awaiting assistance from the International Monetary Fund (IMF), was the worst performing market with a decline of almost 30% over the month.

The region’s problems were not confined to Argentina: all the markets suffered last month. For example, the MSCI Mexico and the MSCI Chile fell by 8.5% and 6.2% respectively.

But most of the concern is focussed on Brazil. The uncertainty about the future presidential elections, with a victory for the radical Workers Party a distinct possibility, is one of the reasons why Brazil has performed worse than other emerging markets. And whichever party wins the elections the new government will have to deal with a growing burden of public sector debt.

Recently JP Morgan, an investment bank, warned that Brazil could suffer a withdrawal of foreign investment in the coming months. The IMF has also acknowledged that the country could suffer “contagion” from the crisis in Argentina.

The Brazilian real lost 7% against the dollar during this month. At the same time Brazil is being perceived as an increasingly risky market by foreign investors – making it more difficult for the Brazilian central bank to reduce interest rates.

Outlook

There is no doubt that the future election in Brazil will put some pressure on all the Latin American markets and their currencies. But even if May brought losses to all the markets it should not be forgotten that each one has its own peculiarities.

Tietoja kirjoittajasta

Fernando Luque

Fernando Luque  es el Senior Financial Editor de www.morningstar.es