Crises Taking Heavier Toll in Latin America

Mexico on Wednesday reported slower economic growth while Brazil and Venezuela were roiled by worries that they may be forced to devalue their currencies, the latest signs that economic crises in Asia and Russia are taking a heavier toll on Latin America.

Slower growth in Mexico and devaluations throughout Latin America could help slow economic growth around the world and add to pressures for another round of devaluations in Asia, analysts fear. Nations may let their currencies fall in order to make their exports cheaper, but this could aggravate other economic problems such as those being suffered throughout Asia.

Mexico reported second-quarter economic growth of 4.27%, below the 4.6% that some economists expected and below the 6.6% rate of the first quarter. The news led to a 1.2% fall in the main Mexico stock market index as investors worried that slower growth would hurt corporate profits.

The report of slower growth is the first indication that three government spending cuts totaling $3.3 billion are beginning to take a toll on the Mexican economy. The cuts were prompted by lower oil prices, higher interest rates because of a weaker currency and turbulence in Asia.

Slower economic growth could increase political pressures on the administration of Mexican President Ernesto Zedillo while sparking higher unemployment and other social worries. One million jobs must be created in Mexico annually just to keep up with population growth.

In Brazil, the Bovespa stock index dropped 1.17% after concern that the Russian ruble could lose up to 40% of its value caused fears that Brazil might be the next country to devalue. Despite government assurances Wednesday that recent foreign capital outflows were unrelated to the ruble’s problems, Brazilian interest rates jumped.

Mauro Guillen, an economics professor at Wharton School in Philadelphia, blamed the renewed nervousness about Brazil on the plight suffered by emerging markets generally in the aftermath of the economic crises in Asia and Russia. Brazil’s fundamental economic status remains good, he said. Inflation is at its lowest level since 1949.

Still, many investors have been shocked by the more than 27% drop in Telecomunicacoes Brasileiras shares since the government privatized the state-run telephone utility on July 29. Traded as so-called American depositary receipts on the New York Stock Exchange, Telebras shares continued to fall Wednesday, losing $3.13 to close at $91.88. The shares closed at $124.38 on July 30.

Even the economic observers who expect a Brazilian devaluation say they do not expect it until after the December presidential elections. Meanwhile, the Brazilian currency, the real, is slowly devaluing at a controlled annual rate of about 8% against the dollar, a rate that government officials vowed Wednesday to defend with reserves that now stand at about $70 billion.

A more pressing case for devaluation could perhaps be made for Venezuela, analysts said, where similar fears caused overnight interest rates to triple to 90% on Tuesday from 30%. Stock prices fell to a 27-month low.

The jump in interest rates is causing the country to consider canceling a $1.4-billion bond offering that it had planned to float to help it finance a $3-billion budget deficit caused by lower oil prices.

A Venezuelan devaluation could provide the government with a short-term fix to its mounting budget deficit, giving it more of its currency, the bolivar, for the dollar-denominated oil it sells. The deficit has grown as a plunge in oil prices has reduced revenue.

As a condition of financial assistance, international lending agencies are urging Venezuela to establish a petroleum stabilization fund. Surplus oil revenues earned in times of high oil prices could be parked there to tide the country over in times such as these when oil prices plunge. Chile and Colombia have similar funds for copper and coffee.

The Venezuelan currency has already lost 12% of value against the dollar this year, a reflection of the government’s lack of political will to shrink budget expenditures in line with the 30% drop in oil revenue.

Also spooking investors is the prospect of a victory later this year by populist presidential candidate Hugo Chavez, who led an unsuccessful coup attempt in 1992. Chavez is currently leading in the polls.

Chilean stocks closed down 1.31%, as the country’s economy continues to be hit by falling commodity prices, caused partly by shrinking Asia demand for copper and agricultural produce. The main Argentine stock index was off 0.12% on news of slower industrial output.

Turmoil in Russia and Asia aren’t the only major problems confronting Latin American economies these days.

The El Nino weather phenomenon has cost Peru about $700 million in damages, while inflating its trade deficit because of lost exports of commodities such as minerals and fish. Brazil could also lose substantial commodity revenues, especially coffee, if a strike persists in Santos, where dockworkers are protesting the privatization of the port facilities.

Bloomberg News was used in compiling this report.

* RUSSIA STALLS REPAYMENT TERMS: Russia delayed announcing terms for repaying its ruble debt. D3

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Mexico Slows

Mexico’s growth rate slowed in the second quarter, hurt in part by weaker government spending. Year-over-year annualized change in quarterly gross domestic product:

1998: +4.27%

Note: Data unadjusted for seasonal variations.

Source: Bloomberg News