More trouble threatens region

Despite the show of support from the International Monetary Fund (IMF) – with a new loan for Brazil of $30 billion (£19 billion) over 15 months – investors remain anxious about the region.

Fernando Luque 20.09.2002
Latin America performed extraordinarily well in August. The MSCI Latin America index gained 9.1% gain (in euros) compared with a rise of 1.4% for the MSCI Emerging Market Free index. Brazil was the best performer with an increase of nearly 23%.

Brazil’s spectacular rise was the result of both the IMF loan and promises by leading foreign banks that they will retain their operations in the country. However, IntesaBCI, one of the largest Italian banks, has already announced that it will leave the region.

But the key problem is not money but investor confidence. In its recent Global Financial Stability Report the IMF expressed concern that the Brazilian crisis could hit the whole region. It was particularly worried that a leftist victory in the forthcoming elections could heighten risk aversion. The report also warns of a contagion risk for Mexico in particular and emerging markets in general.

The outlook for Argentina remains unchanged. The country is not only suffering from a severe recession but also from a political impasse. As a result the authorities are incapable of reaching an agreement with the IMF.

Analysts estimate Argentina’s GDP will grow 1% over the coming year but with inflation of 50%. Even if such figures are not spectacular they would represent a tremendous improvement on the current situation - the IMF expects GDP to decline 15% this year with the inflation rate currently at about 40%. If the analysts are right the country will escape from its four-year recession.

Brazilian election

Many investors would not consider it prudent to invest in Latin America prior to the Brazilian election on October 6th. Latin America is also competing with other emerging market to attract investors’ money and in this battle Asia seems to be winning.

Indeed investors and managers do not exhibit much confidence in Latin America. According to the latest Morningstar Fund Trends survey the region was the least favoured in the world. Some 48% of fund groups expected it to be the worst performer over the next year.

Tietoja kirjoittajasta

Fernando Luque

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