Latin crisis worsens

Fernando Luque 13.08.2002
The situation in Latin America is deteriorating rapidly. The Argentine crisis is far from over, the Brazilian real continues to plummet and Uruguay is also suffering.

Latin American markets suffered huge losses during June and July. The MSCI Latin America Index fell 18.3% in June and 15% in July (in euro terms). These losses significantly exceeded those of the MSCI Emerging Markets Free Index which were 12.6% in June and 7.2% in July.

The economic and political situation in Argentina is problematic. The country is still waiting for the International Monetary Fund (IMF) decision about its debt financing package. Despite such difficulties the Argentine market has stabilised with the MSCI Argentina index even managing to rise some 2% in June and 7% in July.

In Brazil the national currency continues to fall with the real losing 30% of its value against the dollar in the first seven months of the year. The Brazilian market was the worst hit in the region with the MSCI Brazil Index falling 23% in June and 29% in July.

Currently, the Brazilian government is negotiating a new package with the IMF to help alleviate the country’s desperate economic situation. In addition, Brazil is awaiting with uncertainty the forthcoming presidential elections in October.

Investors are concerned that Lula, the left wing candidate who is leading the opinion polls, is likely to ignore the country’s debt repayment obligations if he is elected. The IMF is taking Lula’s potential victory seriously and wants to analyse all presidential candidates’ manifestoes before arriving at a final decision about the release of new funds. Strong depreciation of the national currency on one hand and, the rising long-term interest rates on the other, could leave Brazil with no choice but to suspend the repayments.

Uruguay has also started to suffer as a result of its neighbour’s problems. To avoid a run on the currency the government decided to close all the banks until further notice. Despite these measures some 40% of deposits have been withdrawn since the start of the year.

Market outlook

Political and economic uncertainties in the region are likely to persist in the short-term. The focus of everyone’s attention now is on the outcome of the Brazilian presidential elections in October. There is no guarantee Brazil will not default. The investors in the region must continue more than ever to use their prudence and common sense.

Tietoja kirjoittajasta

Fernando Luque

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