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Tuesday, August 25, 1998 Published at 16:32 GMT 17:32 UK

Business: The Economy

Latin rumba shakes markets

World markets are focusing on Latin America

Latin America's emerging markets look set to become the next focus of the global financial crisis.

Currencies came under pressure last week and stock markets tumbled as investors fled from yet another set of third world markets.

The impact on the wavering Western stock markets, especially in the US, could be substantial.

Nearly all the Latin American currencies are linked to the dollar, sometimes through a crawling peg.

After the battering taken by that link in Asia, speculators are testing other dollar links to see which are vulnerable.

[ image: The gleaming Mexican stock market has suffered this year]
The gleaming Mexican stock market has suffered this year
Since the beginning of the year, the major Latin American stock markets have fallen sharply.

The Bovespa in Sao Paulo is down to a 20-month low, the Mervel index in Argentina is at a 34-month low, while in Mexico the IBC index is down 47% this year. But worst hit so far is the Venezuelan market, down 63% this year.

In the middle of August, rumours of a Venezuelan devaluation, denied by the central bank, sent the market into a tailspin - losing 22% in a week. Brazil fell 11%, and Mexico 10% in sympathy.

The cumulative loss since October 1997, when the Asian crisis first hit Western markets, is now 40%.

Latin America is in a weak position for three reasons.

First, foreign investment plays a big - and increasing - role in these markets. In Mexico one-third of shares are owned by foreigners, a doubling in the past decade.

Big outflows of funds

This money has proved extremely volatile - despite returns on Latin American bonds that have risen to 14.36%, up 2% and nearly 10% above the yield of US treasury bonds.

Confidence has only returned slowly for US investors who remember the fact that Mexico defaulted on its debt in l982 and devalued in 1994.

The dependence of Latin American development to foreign capital - stemming from low savings rates - means that the economic impact is greater.

Political worries

The second factor is political instability. Two of the countries, Venezeula and Brazil, are facing elections this autumn, and left-wing candidates are expected to do well.

The opposition in Brazil attempted to stop the privatisation of the Brazilian telephone company Telebras.

Riot police had to be deployed at the Rio stock exchange to ensure that the sale went through earlier this summer.

That sale, the largest privatisation to date in the region, raised $19bn that is vitally needed to cover growing budget deficits.

The pressure from the left has led governments - especially in Brazil - willing to run large budget deficits to fund government projects.

Brazil's budget deficit is 7%.

Currency woes

[ image: Venezuela's currency dealers have little to celebrate]
Venezuela's currency dealers have little to celebrate
Thirdly, currencies are under pressure because there are big trade deficits in most Latin American countries.

Over 50% of its exports are commodities and commodity prices are way down.

The biggest victim has been oil-rich Venezuela. The oil price has fallen nearly 50% since the beginning of the year despite the belated attempts by OPEC to restrict output.

In addition, Venezeula agreed to make the largest proportional reduction in output of any OPEC country.

Venezeula has only $14bn in foreign currency reserves, but it has tried to operate a slow devaluation, where the value of its money, the bolivar, is adjusted every month.

Finance Minister Maritza Izaguirre has said he wants to maintain that position.

"Our position is not to have an immediate devaluation," he said.

As demand in the world economy has slowed down, the trade gap has widened.

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