Commentary: How Latins Can Survive The Asian Stormby
Since Asia's crisis erupted last year, Latin Americans have complained that their markets are being unfairly tarred by events beyond their control. The region's healthier economies and better-managed banks, Latins argue, should not be linked by skittish investors to Asia's woes. Like it or not, though, investors see both regions as part of the same emerging-market class. "The worst of the Asia crisis is behind us, but we're still not the masters of our destiny," says former Brazilian central bank chief Francisco R. Gros.
That's why major Latin stock markets are down an average 10.5% this year, despite strong fundamentals in Brazil, Mexico, and Argentina. Initial public offerings, which gained momentum in 1997, have been put on hold. And the yield gap between Latin debt and U.S. Treasuries remains wide: around 300 basis points for Brazil's five-year notes, compared with 140 before the crisis hit.
UNEASY. To hold back the Asian shock, Brazil has raised interest rates, cut spending, and pledged to defend its currency. But investors are still uneasy, with reason. The region's deficits in trade and current accounts could worsen, putting new pressure on currencies as Asian competition in world markets revs up. For Brazil and Argentina, the ratio of foreign debt to exports--a key measure of their ability to pay their way--is about 300%, or three times what most analysts prefer. So despite extensive free-market reforms in recent years, Latin America still has a lot to do before it can be considered a safe haven--or at least a breed apart from riskier emerging markets.
In the short term, some governments will have to keep economic growth in check to curb import demand. For Brazil, that means holding growth to 2% or less this year. But a top priority must be to beef up exports. President Fernando Henrique Cardoso hopes to double Brazil's annual exports to $100 billion by 2003, aided by export promotions and incentives. But to expand exports long-term, Latin Americans will have to boost productivity by spurring industrial efficiency and improving infrastructures.
The U.S. must do its part, too. "Moving forward with free trade would be reassuring to the markets," says Richard Feinberg, former adviser to President Clinton on Latin American affairs. "It would show that the U.S. is behind Latin America." For starters, the U.S. Congress needs to find common ground between Democrats and Republicans to provide authority for Clinton to launch hemispheric trade talks.
To attract foreign investors, Latins also must create a more business-friendly environment. Throughout the region, maddening bureaucracies and complicated regulations and tax systems impose heavy burdens. In February, Ford Motor Co. said it was considering cutting back on future investments in Argentina because of high production and labor costs. The latter are raised by rigid labor-market restrictions and union health-care monopolies that President Carlos Menem has been slow to overhaul.
To escape from the emerging-market stigma, Latin America will have to pursue even deeper reforms, such as curbing endemic corruption. At a BUSINESS WEEK conference on Latin America in February, 57% of participants, many of them multinational executives, said they had been asked for bribes. And while privatizations have become a linchpin in Latin America's conversion to free markets, they must become more transparent and better organized. In recent weeks, investors have been scared away from Brazil's cellular B-band sales by long-running legal wrangles over the bidding process.
Latin America's surges of reform in the early 1990s, and again following Mexico's 1994 peso collapse, were a good beginning--but not enough, as it turns out, to assuage jittery investors' fears of contagion from Asia. What's encouraging is that the latest threat has helped mobilize broad support in key countries for even more fundamental reforms. This time, leaders should seize the chance to make sure the region will indeed be a safe haven the next time an emerging-market crisis erupts.