Feature: Latin America's collateral damage
www.upi.com By Bradley Brooks UPI Business Correspondent From the Business & Economics Desk Published 2/3/2003 6:54 PM
RIO DE JANEIRO, Brazil, Feb. 3 (UPI) -- Grace Souza Calvocante considers herself collateral damage of a war that hasn't yet come in Iraq.
"The first thing they raise the price of is gas," said Calvocante, a mother of three in her late 40s who makes her living cleaning apartments inhabited by tourists.
"Then they raise the price of food, then clothing, then the costs of transportation -- which also makes all the other products more expensive," she said as she perused the aisles of a grocery store on Monday.
"And if there is a war, the tourists will stay home in front of their TVs, they won't come here, and I won't have work."
So it goes for the inhabitants of a region with some of the most turbulent economies in the world.
While the countries of Latin America might not send a single soldier to the Middle East, the fighting that goes on there will nonetheless bring pain -- of the economic sort.
"What the war implies for Latin America is more or less what it implies for the United States and other industrial countries," said William Cline, a senior fellow at the Center for Global Development and the Institute for International Economics in Washington.
But for the already anemic economies of the region, that could bring a fatal blow, as opposed to the increase in economic discomfort the First World would register.
"You have investor caution during the course of a war, and that has a particularly painful effect for Latin America," Cline said. "The investment flows in bonds and bank lending to Latin America tends to dry up when there is a period of high risk aversion."
That's a scary thought for Latin American businessmen, considering that the well of foreign credit and investment in the region is already bone dry.
Investor appetite for pushing into Latin America severely diminished in a disastrous 2002 that saw Argentina founder, Brazil stumble and Venezuela threaten to fall flat.
Even Chile -- the beacon of stability and progress, with its free trade pacts with both the European Union and the United States -- would feel great pressure if war comes to Iraq: the country imports 80 percent of its oil.
Local analysts forecast that the turbulent ride for Latin America -- just beginning to ease -- will be ready to begin anew should the bombs start falling on Baghdad.
"A war would affect Brazil by preventing recovery in the flow of foreign direct investments and credit lines that we were starting to see recover after the political crisis we lived through," said Carlos Firetti, director of BBV Corretora de Valores in Sao Paulo, Brazil.
"As a consequence, this would keep the foreign exchange under pressure. In the case of Brazil, this would mean that inflation would not reduce as quickly and interest rates would be kept at a high level," he said.
Brazil -- Latin America's largest economy -- is burdened by its massive $240 billion debt, much of which is linked to the dollar or floating interest rates. This makes the debt highly susceptible to fluctuations in the exchange rate for the local currency -- the real.
That would also place the spotlight even more on new President Luiz Inacio Lula da Silva -- a leftist whose election spooked investors.
During his campaign, Lula promised voters the moon when it came to improving the horrific social situation in Brazil, where some 40 million people live below the poverty line.
Analysts question how the government will pay for its social programs should war severely crimp Brazil's economic situation.
This has grown as a concern for analysts after a top adviser to Lula said Monday that no cuts would be made in social spending, whether war breaks out or not.
While Lula's moves during his first month in office have eased investors' anxieties, the economic shocks that would come with a war in Iraq could trip him up, analysts say.
For instance, the domestic pricing policies of state-run oil giant Petrobras might be used by Lula to artificially improve Brazil's economic situation in a time of war.
"The main concern is that the government could hold oil prices down in order to keep inflation under control, or so they're not affected by public opinion that is clearly against increases in oil prices," Firetti noted.
What can the leaders in Latin America do to lessen the pain of external shocks that a war in Iraq will bring?
"I think there isn't much to do," Firetti said, specifically in regard to Brazil.
"In fact, the only thing they can do is follow through with a credible economic policy and give signs to the market that they will go through with reforms."
Cline agreed, saying: "The main thing they can do is to continue to show international investors a firm resolve to keep basic policies on a healthy trend," he said. "That means making sure fiscal accounts are in order and making sure the exchange rate isn't out of line."
For Calvocante -- already struggling to make ends meet in a year that saw Brazil's currency lose about 35 percent of its value against the dollar -- weathering the affects of a war has little to do with complicated economic policies.
For her, it is math of a simpler sort.
"I might pay 60 cents for a kilo of rice now. But if there is a war, the price could go up to $1.20," she said. "That is a big problem for me."