SUNS  4331 Wednesday 25 November 1998



LATIN AMERICA: THREAT OF FINANCIAL CONTAGION FADES

Rio de Janeiro, Nov 23 (IPS) -- Sao Paulo's stock exchange saw an accumulated rise of 12.03 percent last week, suggesting that the worst of the financial crisis is now over for Brazil, and implying Latin America may escape the worst of the epidemic.

However, the region will undoubtedly suffer some minor symptoms, and the 32nd session of the Latin American Banking Federation (Felaban) meeting in Panama City concluded that, although not in a critical state, the region still faces "a pretty difficult situation."

Outgoing Brazilian president of Felaban, Sebastiao Cuhna, addressing a meeting of some 1,000 Latin American bankers, said the current crisis had raised the question "of whether Latin America can be economically stable and economically viable."

IMF Managing Director Michel Camdessus, speaking at the inauguration of this meeting last week, admitted Latin America had been the victim of an imported crisis, and called on the industrialised countries to reform the international financial system in order to avoid a recurrence of this.

In this vein, executive secretary of the Economic Commission for Latin America and the Caribbean, Jose Antonio Ocampo, called for action overcome "the massive asymmetry between the increasingly sophisticated and dynamic financial world" and the international entities which should manage this.

Meanwhile, capital flow is still negative in Brazil. Over the last week the net outflow was 919 million dollars, making an accumulative 4.05 billion over the last 30 days.

But this is something that no longer worries the market, given the expected inflow of nine billion dollars as a first instalment of aid agreed with the International Monetary Fund (IMF) in early December.

The aid package for Brazil also involves the World Bank, the Interamerican Development Bank and the governments of 20 countries, making a round total of 41.5 billion dollars, 90 percent to be
delivered in the next 12 months.

Most of Brazil's foreign debt stock is negotiated in Brady bonds, which fell to less than half their nominal value in September only to bounce back to slightly above 67 US cents in New York Friday, a strong indication that investor confidence is improving.

The world market reopened its Latin America section, following an almost total closure from August to October. Various countries, led by Argentina, raised large amounts of funds in Europe and the United States, coming close to a total of four billion dollars this month, a figure rarely seen.

"We are getting back to normal," said Francisco Gros, former president of Brazil's Central Bank, and today head of US bank Morgan Stanley in Latin America.

Interest rates are still high, a lingering symptom of the crisis, but are falling with every extra foreign operation by the large Latin American concerns, like Mexico's Pemex oil concern and its Argentine
counterpart YPF.

In fact the other countries of the region were lucky the international turbulence landed on the broad back of the Brazilian economy before hitting the rest of the region, prompting swift action from the
international community in order to block the domino effect.

With 70.21 billion dollars of reserves in late July, Brazil was able to withstand an exodus of 30 billion dollars from August without collapsing like Mexico and some Asian countries have done in the last
few years.

But some damage was inevitable. Interest rates in Brazil's Central Bank climbed to 42.75 percent, a repeating of policy implemented in October 1997 when the Asian crisis first broke, bringing the national economy to a standstill.

Since the announcement of agreement with the IMF, the Central Bank has been reducing its base interest rate, but only slowly, 0,5 percent points per day. On Friday it paid 36.5 percent for the funds accepted from the financial institutions, and still has one of the highest rates in the world.

Surging interest rates will now be accompanied by a fiscal adjustment programme which must raise 23 billion dollars in 1999, and this will mean economic recession, at least in the first half-  year.

Labour economy researchers, like Jose Marcio Camargo, are predicting increases in unemployment to 12 or 13 percent within five months, compared with the current 7.2 percent.

The poor economic performance of Brazil has been reflected in trade throughout South America, especially in the Southern Cone Common Market (Mercosur) and with the bloc associates, Bolivia and Chile, although in a form less lethal than financial collapse.

Brazil's imports from January to September fell by 4.8 percent compared with the same period of 1997, a period when trade disputes with Argentina cropped up repeatedly. And any recession in the biggest member of the Mercosur is bound to worsen conflicts in the subregional bloc.