Comparisons between the debt servicing crisis of 1982 and the current problem are inevitable, despite the differences in economic backgrounds. There has been concern that Mexico's problems could undermine the position of Argentina, where there are new presidential elections this year, as well as Venezuela, only just emerging from inflation and a series of banking collapses.
The vulnerability of Latin American economies to confidence scares is a result of their success in reforming their financial structures. Moves from military dictatorship to democracy have been accompanied by widespread capital market reforms, including privatisations, designed to make the Latin economies more attractive to foreign investors.
Unlike the international commercial banks, which took Latin American risks on the nose in the mid-1980s, the new money is largely shorter-term portfolio investment that can uproot itself as quickly as it flows in. Before the peso plunge the OECD saw the most serious problem facing Latin America as the strength of these capital inflows, which if they were accommodated in the domestic economies of the countries concerned, posed a serious inflationary threat. In Mexico and Argentina the opposite is seen to be the case. The trouble occurs when investors, panicked by an uncontrolled devaluation in Mexico and fear of the same in Argentina, remove their funds quickly. There are huge sums at stake; in 1993 net inflows of capital to Latin America totalled a record $65 billion, almost matched by last year's $57 billion.
The objective of the rescue package for Mexico is to make sure that the hard won gains across the continent are not lost. Evidence suggests foreign investors are mature enough not to tar all countries in the region with the same brush. Last year in Brazil, where political and economic reforms are falling into place after almost a decade, the stock market rose 60 per cent and in Chile, regarded a model of economic renaissance, the equity markets climbed 51 per cent. This contrasts with Mexico and Argentina where the combination of domestic political uncertainties and rising US interest rates contributed to sinking share values. By year end, as Mexico's problems emerged, Argentinian markets had dropped by 18 per cent.
Most critical of all to the region's continued modernisation and expansion in 1995 is Brazil's return to normality under new President Fernando Henrique Cardosa. With the help of foreign capital Brazil, which has a GDP representing some two-thirds that of the whole region, ought to be the powerhouse for Central and South America. Forecasts by the UN Economic Commission for Latin America suggest that this could be the best year for a decade as recovery in Brazil picks up momentum from GDP growth of 3.7 per cent in 1994 to 4.5 per cent this year. The OECD takes a more cautious view, arguing that measures to restrain inflation could lower growth, but increase long-term confidence in the administration's determination to provide a durable framework for stability.
As matters stand the new Brazilian administration is planning to send a package of proposed reforms to its Congress mid-way through February. Among the key proposals are to ready some state monopolies for deregulation and privatisation; remove remaining barriers to direct and portfolio foreign investment and enhance the economic stabilisation plan through cuts to lower the budget deficit to $11 billion. But reform does not always bring immediate benefits.
The exposure of the three Brazilian air carriers Varig, Transbrasil and Vasp to more competition, deregulation and the global marketplace has left them struggling. But as costs are cut, buying into Brazil's large potential air market will become increasingly attractive.
Nothing attracts foreign banks and investors more than signs that a strong anti-inflationary strategy has been put into place. Brazil's new currency, the real, helped cut inflation from 50 per cent per month in June 1994 to 3 per cent per month in the second half of 1994. This year annual inflation is projected to come down to 40 per cent, still far higher than its neighbours but a big improvement. The OECD is also impressed by the trade liberalisation being implemented, which promises a more open economy for foreign businessmen wishing to tap into Latin America's biggest marketplace.
Across the region, all the major Latin American economies are expected to grow (Venezuela apart), achieving expansion rates of 5 per cent or more. Moreover, in many cases this is now accompanied by single digit inflation rates. Clearly, shocks such as Mexico could cause problems. However, technically a devaluation of some 30 per cent, providing it does not become uncontrolled, would be good for Mexican exports and lead to a strengthening of both business and tourism .
But the new governments of Mexico and Brazil will need to show foreign investors that they will not resort to the old free spending protectionist and over-regulated ways at the first sniff of cordite.
Source: Airline Business