The financial crisis which rolled out of Asia's once rapidly growing economies and enveloped Russia and the countries of the former Soviet Union, is now hovering over the Latin American region just when its growth had reached record levels. The political and economic restoration of South America - after the debt crisis of the 1980s - has been one of the most remarkable global success stories of the last decades. Across the continent, confidence in financial markets has been restored as the crippling rates of inflation which historically hampered economic progress have been tamed, and democratic governments have replaced the military dictators of a decade ago, all of which has helped secure steady growth.

In 1997, growth across the region reached 5.1%, its best level since 1990, provoking a wave of new interest in the region from foreign investors, bankers and air carriers who have been in a hurry to secure alliances in the region. The fall-out, however, from the Asian crisis and Russia, together with the "credit crunch" seen in New York late this year has totally changed the region's atmosphere and prospects. The forecasts for output are being rapidly downgraded, with the International Monetary Fund predicting in October growth of 2.7 % for the region this year and 2.8 % next year - figures which already look over-optimistic.

Investment banker Goldman Sachs wrote in its latest authoritative International Economics Analyst report, that the best case scenario for the region is 1-1.25 % growth - a dramatic cutback - and the worst case, a plunge into recession. The key to the overall performance of Latin America is always Brazil. As the ninth largest economy in the world (measured by gross domestic product) and with a GDP equivalent to half that of the whole Continent, it is difficult to imagine any substantial growth across the region when Brazil is suffering.

In fact Brazil is seen as the test case for the measures which the West is seeking to put into place to prevent the world slipping into a full blown recession. As Goldman Sachs has noted: "A strong programme in Brazil and efforts by the Group of Seven [G7] countries to normalise credit markets is critical for emerging markets. Without them, inflows to emerging markets could collapse, leading to debt servicing problems in 1999."

Despite what was seen as a satisfactory outcome to the Brazilian elections this autumn, with the re-election of the reforming government of President Fernando Henrique Cardosa, the capital outflows have been immense. Western banks and creditors have cut their lines of credit, fearing that Brazil could be the next Russia - where they made huge losses. Around $40 billion of capital may have flowed out of Latin America as a whole, since the Russian crisis erupted in August 1998, bringing the whole process of investment to a halt and sending stock markets and currencies into reverse.

In an effort to restore confidence and stem the capital outflows, the Brazilian authorities proposed sweeping cuts to the domestic budget and tax increases designed to cut the budget deficit, which is now at 8% of GDP, by some $23.5 billion in 1999 alone. The package ran into heavy waters in the US Congress, and has not been fully stress-tested by the IMF. The Brazilian authorities are notoriously poor at meeting budgetary targets because of the federal structure of the country which makes it that much more difficult for the government to deliver on tax collections and spending cuts. In this regard, Brazil is not unlike the Soviet Union.

But the G7 cannot afford another Russian-style fiasco as the threat to the global financial system, which recovered strongly in the autumn, would almost certainly return. It has been marshalling a $30 billion package of assistance, one of the biggest ever assembled, with the aim of halting the cash outflows and restoring confidence. The biggest contributor to the package would be the IMF but others, including the World Bank, the Inter-American Development Bank and Spain (which has strong bilateral and financial ties to Brazil), have committed substantial amounts.

If a line can be drawn in the sand on Brazil then perhaps the potential slowdown elsewhere can be avoided. In the first half of this year Argentina grew at a fast 7.1% clip, but that is unsustainable. Looking ahead, higher financing costs, lower commodity prices and a substantial drop in share markets will keep consumption and investment subdued. Moreover, the problems in Brazil - Argentina's biggest trading partner - could lead to higher unemployment, weaker revenue collection and a worsening of the fiscal position.

In other words, an uncomfortable downward spiral. Mexico has been through its own bout of volatility and, with interest rates at high levels, will also see a sharp slowing down in growth, while Venezuela has been shaken by financial and political shocks as well as low oil prices. The economy there will barely grow in 1998, and will almost certainly be in recession next year.

Although a rescue for Brazil might alleviate the situation it is clear that Latin America will enter 1999 a much weakened economy after the high hopes of 1997 and earlier this year. It will also find that the main market for its goods (some 20% of Latin America's exports go to the USA) is in poor shape.

All of this will have a profound effect on the airline industry. Costs will undoubtedly be lower as a result of low oil prices and tumbling currencies across the region. But with business opportunities in retreat and incomes constrained in the USA and Europe, traffic will be severely impaired. The region may not become attractive to investors again until early in the next century.

Source: Airline Business