Article: Attacks Impacting Latin American Growth

Summary

The terrorist attacks on New York and Washington last week will have serious economic impacts outside of America. A likely recession in the United States will quickly spread to Latin America, with many governments expecting flat to negative growth. A prolonged downturn will increase instability and social conflict.

Analysis

Latin America's economic growth was already slowing before the Sept.11 suicide attacks in New York and Washington, D.C. But in the 10 days since the World Trade Center collapsed, the region's economic downturn has accelerated considerably.

From Mexico to Chile, governments across the region now anticipate a year or more of flat to negative growth. The economic outlook will darken even more if Argentina implodes financially and drags down Brazil in its wake. A lengthy recession in Latin America will increase political instability and social conflict across the region.

With many Latin Americans now equating free markets or "neo-liberalism" with corruption, poverty and tumbling economies, voters in many countries could be persuaded to turn against governments and political parties committed to free-market policies and open regimes. This trend is already visible in countries such as Nicaragua and Brazil.

Latin American economies are particularly vulnerable to the global economic aftershocks of last week's attacks because they are heavily dependent on international credit. Rating agency Standard & Poor's said the attacks could limit emerging markets' access to capital markets and could even lead to a downgrading of some sovereign bond ratings, including those of Argentina, Brazil, Colombia and Jamaica.

Wall Street firms active in emerging markets were angered by the agency's pessimism. But Reuters reported Sept.19 that international capital markets have shut down completely to emerging market borrowers since the attacks. Also, when international capital markets open up again, Latin America will find it difficult and expensive to raise new international debt.

The region's capital crunch during the coming year will be compounded by three additional factors: a recession in the United States that likely will persist until mid-2002 at least, simultaneous downturns in Europe and Japan and a steep drop in foreign direct investment flows into Latin America. This will hurt manufacturing output and employment across the region and weaken export growth, making it more difficult for many countries to finance their current account deficits and cover their debt payment obligations.

Argentina has a debt plan in place that puts off most debt payments until 2003. However, Economy Minister Domingo Cavallo told Clarin, a daily newspaper in Buenos Aires, that a slowing world economy would make Argentina's recovery more difficult. In fact in the two days since U.S. trading resumed, yield spreads on Argentine debt increased to around 1,600 basis points over comparable United States treasuries, Reuters reported.

Cavallo's guarded acknowledgement that Argentina's early economic recovery is increasingly doubtful following the attacks could be the first tentative move toward officially seeking to restructure the country's $130 billion foreign debt, but this will not happen until after the Oct.14 congressional elections.

Cavallo also warned Argentines the country now has to "fend for itself," meaning deeper cuts in government spending. Public spending has already been reduced 13 percent this year as part of the country's "zero deficit" plan, and the government is pushing the National Congress to approve $6 billion in additional cuts next year.

But the country's persistent economic recession has entered its fourth year, unemployment tops 16 percent and an unpopular president faces a growing wave of strikes and protests. Collapsing consumer confidence could trigger a banking crisis if panicked depositors empty their accounts and hoard cash in anticipation of a default and devaluation.

Such an outcome nearly happened in August when nervous depositors withdrew 11.6 percent of the banking system's total deposits. The International Monetary Fund's $8 billion aid infusion plugged the gap created by the run on Argentine banks and postponed a debt default, but another IMF bailout isn't likely.

Cavallo predicted the ruling coalition of the Radical Civic Union and Frepaso will lose the Oct.14 congressional elections because it has shown it is incapable of governing Argentina. Cavallo, who leads the center-right Action for the Republic party, also said Argentina should "seriously rethink" its relationship with Brazil if that country perseveres in its devaluation policy.

At mid-year Brazil's Central Bank cut the country's growth forecast for 2001 from 4.5 percent to 2.8 percent. But Central Bank Chairman Arminio Fraga said Sept.17 that the revised target won't be achieved either. Private Brazilian economists surveyed by the Central Bank before the suicide attacks forecast average growth of 1.7 percent this year.

In fact, Brazil's economy likely will be flat by the end of 2001 as the spreading global impact of a U.S. recession takes hold. The United States is the largest importer of seven of Brazil's top 12 export products, including shoes, cell phones and auto parts. Demand for these goods is expected to drop almost immediately in the United States.

The foreign ministers of Argentina, Brazil, Paraguay and Uruguay will meet Sept. 24 in Washington, D.C., with senior U.S. trade officials, according to Uruguay President Jorge Batlle. Market access will top the agenda of this first official discussion between the United States and the South American Common Market (Mercosur). However, no breakthroughs are expected because issues vital to Brazil -- like U.S. anti-dumping laws -- will not be discussed.

In Mexico, which ships over 80 percent of its exports to the United States, Central Bank President Guillermo Ortiz said he expects a flat economy in the third quarter of this year and recovery starting in the fourth quarter. However, Mexican bank BBVA Bancomer forecasts economic growth of between 0 percent and 0.4 percent for 2001 compared with 6.9 percent growth in 2000.

In fact, a U.S. recession lasting through mid-2002 likely would prolong Mexico's economic downturn until 2003. Mexico's hopes of obtaining a preferential immigration agreement with the United States also were lost on Sept.11.

Chile, which ships 18 percent of its exports to America, and Colombia, which sends half of its exports there, will also feel the U.S. recession. As the region's largest or best-performing economies stagnate or shrink in coming months, the ripple effects will spread quickly through the rest of the region.

Venezuela may be the only economy that will escape relatively unscathed thanks to its oil resources and higher international oil prices. In fact Venezuela could become a haven among emerging economies for investors who haven't lost their appetites for risk.

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