A similar pattern is apparent if performance is measured from the start of the year. Latin America has fallen by 5.6% compared with a fall of 10.3% for the developed markets. Venezuela was the worst performing Latin market with a fall of 16.9%, followed by Mexico which dropped by 9.2% and Brazil which fell 4.2%. Argentina, in contrast, gained 15.8%.
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Lula da Silva, the recently elected Brazilian president, is trying to keep inflation under control by raising interest rates (the last change was an increase from 25.5% to 26.5%). The country’s trade balance is also showing some improvement.
Optimism reasons
Horst Köhler, the managing director of the International Monetary Fund (IMF), sees three reasons to be optimistic about Brazil (see link on right): “First the smooth and peaceful democratic transition in Brazil provides ample evidence of its political maturity … Second, President Lula da Silva has defined the right agenda: growth and macro-economic stability with social equity … And third, the new Brazilian government has shown the continuity in macroeconomic policies needed to curtail inflation and keep public finances on a steady course.” He concludes by saying that: “we should recognize Brazil’s enormous potential. Abundant natural resources and a potentially huge market place of more than 180 million people continue to attract significant foreign direct investment.” But this high dependence on foreign capital is itself the country’s most serious handicap. In April the country has to refinance a $5 billion (£3 billion) external debt and a $3 billion internal debt.
Argentina has reached an agreement with the IMF while its industrial production has been stronger than expected by analysts. But much will depend on the results of the general election in April. On the other hand, the decision of the supreme court of one of the provinces to rule against the forced conversion of bank deposits in foreign currencies to pesos (during last year’s peso devaluation) could jeopardise the whole banking sector. As Mr Köhler said: “the situation remains fragile and there is still a need for a more comprehensive medium-term economic program”.
The relatively strong performance of Latin America since the onset of the Iraq crisis goes against the normal trend of a “flight to quality” during uncertain times. But investors should remember that the region remains vulnerable if international conflict is protracted.
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