Tuesday 14 October 2008, San José, Costa
Rica
ECONOMY-SOUTH AMERICA:
Day-to-Day Impact of
Crisis Not Yet Felt
By Mario Osava*
RIO DE JANEIRO (IPS) -
The financial crisis
that originated in the
United States
demonstrates, more
clearly than any
previous such event, the
distance between capital
markets and ordinary
citizens, especially in
developing countries.
Most people in South
America have not yet
felt the effects of the
panic sweeping those
with investments in the
stock markets, big
companies or abroad. But
the newscasts are
frightening everyone,
because of the size of
the figures being
bandied about, and due
to memories of previous
economic crises.
In Brazil, the value of
the local currency, the
real, has dropped by
31.6 percent against the
dollar since August, and
the Sao Paulo Stock
Exchange (BOVESPA) has
fallen by 20 percent so
far this month, and 44.2
percent since the
beginning of the year.
The day will come,
experts say, when these
indices will produce
inflation, unemployment
and the exacerbation of
social ills.
The enormous volatility
seen in previous crises
is being repeated in
Brazil. Part of the
downturn in the stock
market is due to
speculation by
industrial companies in
other markets,
particularly the foreign
exchange market.
Three large industrial
firms posted losses of
4.9 billion reals (2.2
billion dollars) due to
betting on the continued
overvaluation of the
real. It is feared that
the solidity of other
companies will also be
undermined by these
damaging transactions.
The Central Bank’s
exchange policy was
largely responsible for
this misadventure,
because it supported
heavy overvaluation of
the local currency,
which hurt the
competitiveness of
Brazilian industries.
In mid-2002, when
markets were jittery
over the imminent
triumph of leftwing
presidential candidate
Luis Inácio Lula da
Silva, the exchange rate
stood at nearly four
reals to the dollar, but
it strengthened to 1.56
per dollar by Aug. 1 of
this year. Since then,
however, the real has
plunged to 2.31 against
the dollar.
Such volatility is due
to "excessive previous
overvaluation," and to
excessively high
interest rates set by
the Central Bank, which
attracted large amounts
of speculative capital
to the country, former
Central Bank director
Carlos Thadeu de Freitas
told IPS.
The devaluation of the
real against the dollar
in the last couple of
months, a "correction"
according to many
economists, shores up
the competitiveness of
local industry, but will
drive up inflation,
which at an annual 6.25
percent is already high
with respect to the
target set by the
government.
Therefore the Central
Bank is expected to
continue raising the
interest rate, which at
present stands at 13.75
percent, one of the
highest in the world,
and so accentuate the
economic slowdown. In
spite of this, experts
forecast gross domestic
product (GDP) growth of
three to 3.5 percent in
2009, compared to the
five percent projected
for this year.
The deepening of the
crisis throughout the
industrialised world led
President Lula finally
to recognise that Brazil
will suffer from its
effects, after initially
dismissing its possible
impact on the country.
Venezuelan President
Hugo Chávez, after
celebrating the decline
of capitalism, has also
admitted that "we are
not immune."
Crisis contagion in
Latin American countries
may occur in a number of
ways. Mexico, the
Caribbean and Central
America are obviously
vulnerable because they
are highly dependent on
the United States,
either through trade or
through rapidly
diminishing remittances
sent home by migrants.
Venezuela's Achilles'
heel is oil. "If the
price of crude does not
stabilise at around at
least 80 dollars a
barrel, its foreign
exchange inflows will be
seriously affected,"
economist Pedro Palma,
the head of
MetroEconómica, a
consultancy firm, told
IPS.
But it will take longer
for the crisis to have
an impact on day-to-day
life in Venezuela than
in other countries,
because of the powerful
presence of the state in
the economy. In the
medium term, when the
impact occurs, it will
be serious, however,
because crude exports,
worth 44 billion dollars
a year, account for 20
percent of GDP.
At that point, scarcity
of foreign exchange will
force "companies, savers
and consumers to buy
more expensive black
market dollars, which
will fuel inflation,"
Palma predicted.
Inflation in Venezuela
is currently 30 percent
a year, the highest in
the Americas, and on the
black market the dollar
costs close to five
bolivars, compared to
the official exchange
rate of 2.15 bolivars.
Venezuela's difficulties
could also spread the
effects of the crisis to
some 15 countries that
receive Venezuelan oil
aid, amounting to
200,000 barrels a day at
favourable prices. If
the crisis reaches the
dimensions that have
been predicted, "many of
the government’s aid and
cooperation programmes
will fall by the
wayside," warned former
Venezuelan energy
minister Álvaro Silva.
In Argentina, chain
reactions are what most
concern local
entrepreneurs. This
country will be hit hard
by potential economic
slowdown in Brazil, its
main trading partner and
fellow member of the
Southern Common Market (Mercosur),
to which Paraguay and
Uruguay also belong and
Venezuela is in the
process of joining.
A flood of cheaper
Brazilian industrial
goods, like the ones
that have created
conflicts in the past,
could happen again if
the real depreciates
more than the Argentine
peso.
This would exacerbate
the imbalance in
bilateral trade, which
was already growing.
From January to August
of this year, Brazil had
a trade surplus of 3.57
billion dollars in its
trade with Argentina, 40
percent higher than for
the same period in 2007.
But "Argentina does not
appear to be one of the
countries directly
affected" by the global
financial crisis, since
there is no adverse
information on its "real
economy," said Mariano
Lamothe of abeceb.com,
an economic consultancy
in Buenos Aires. "Brazil
devalued (its currency),
but it isn't going to
stop buying from us, nor
will it stop growing
overnight," he told IPS.
Lamothe acknowledged
that there were
"negative expectations
and great uncertainty,"
with raised interest
rates, depreciation of
the peso, and more
expensive credit that
will reduce consumption
and exports. However, he
said he was convinced
that there was "no risk
of a run on the banks,
nor of the feared flood
of imported products."
He admitted that in the
field of theory, this
crisis "has contradicted
all logic," and that
"financial engineering
failed, and economic
orthodoxy is not coming
up with solutions."
"There is a great deal
of confusion," he
concluded.
*With additional
reporting by Marcela
Valente in Argentina and
Humberto Márquez in
Venezuela
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