Trickle-down fears weigh on S. America - Possibility of war depresses stocks, sales, currencies

www.chron.com Feb. 21, 2003, 2:40PM Associated Press

WHY IRAQ MATTERS IN LATIN AMERICA · Exporters fear that consumers, particularly those in the United States, will buy less if there is a war. · High oil prices have pushed up inflation. · War worries have driven down stocks and slowed foreign investment. · It could slow the growth of economies worldwide.

How they are doing:

CHILE: The economy grew 1.9 percent last year, with a 3 percent spurt in the last three months, according to the country's central bank.

Its inflation rate of 2.8 percent was less than a quarter of the region's average of 12 percent, according to United Nations estimates.

BRAZIL: The central bank this week raised interest rates for the fifth time since October as it tries to slow inflation at a five-year high.

Seeking to rein in inflation, which hit 14.5 percent in January, the central bank raised its overnight lending rate Wednesday by 1 percentage point to 26.5 percent.

The prospect of war in Iraq has caused the currency to weaken further this year.

VENEZUELA: The country's economy is slowly coming back from a paralyzing strike. While most sectors are back to work, oil exports, the government's main source of income, are still about half what they were.

Interest rates have risen sharply because of fears of a default, which would reduce investment in an economy that contracted 17 percent in the fourth quarter.

ARGENTINA: The Argentine peso dropped further Thursday while central bank authorities pondered whether to continue trying to prop it up. The currency has slumped 70 percent against the dollar since devaluation in January 2002, leading to fears its lost buying power will lead to hyperinflation.

MEXICO: Stocks and currency have been off because of fears its export-oriented economy will sink with that of its biggest customer, the United States.

-- Bloomberg News

SÃO PAULO, Brazil -- In a small factory in a blue-collar neighborhood of this vast industrial city, dozens of workers churn out parts for pressure cookers, essential items in most Latin American kitchens.

But the management of Acessorios para Panela de Pressao is worried about an economic threat half a world away that could lead to reduced sales and layoffs: a U.S.-led war against Iraq.

Higher oil prices linked to fear of war have already boosted inflation from Brazil to Chile. And a much-anticipated regional economic recovery is on hold, with concerns that the situation could get worse before it gets better.

Brazilian sales of Acessorios' parts for pressure cookers -- widely used to make feijoada, Brazil's national dish of black beans, rice and pork -- are down 50 percent since January because of double-digit inflation and consumer uncertainty over the economy's direction.

The firm has maintained production and its 85-employee work force only because of a spurt in exports to countries such as Colombia and Ecuador.

But demand could plummet beyond Brazil's borders if war breaks out and consumers across the region limit spending and decide to use their old pressure cookers longer, company manager Luciana Pereira Lopes said.

"Usually, sales pick up after carnival," which takes place in early March this year, she said. "But the uncertain thing is how the war could affect the Brazilian economy and the external market."

The war fears have already hurt Latin American stock markets, curtailed foreign investment and prompted investors to push down the value of currencies in Mexico, Chile and Brazil.

While their devalued currencies have helped Latin America boost exports to the United States and Europe, experts warn that a war could reduce global demand for goods ranging from Brazil's manufactured and agricultural products to Chilean wine.

"Right now, talk of war has stalled everything," said Ricardo Amorim, head of Latin American research at the New York-based IDEAGlobal. "If war breaks out and the world economy performs worse, the impact on the Latin American economy will be deeper."

A short war with Iraq could cost the world 1 percent of its economic output over the next few years and more than $1 trillion by 2010, researchers said in a report Thursday. A long war could more than triple the costs, they said.

The compounding effects of rising oil prices, extra budget spending and economic uncertainty could cut $173 billion from the world economy in 2003 alone, said the researchers, Reserve Bank of Australia board member Warwick McKibbin and Centre for International Economics executive director Andrew Stoeckel.

The economies of Brazil and Argentina were hit particularly hard last year. Mexico suffered because its economy is so tightly linked to the United States, and the country could face tough times in war if the U.S. economy stumbles more.

Experts say Argentina wouldn't suffer as much as Mexico or Brazil if war breaks out because the country has already virtually struck rock economic bottom, pummeled by a 5-year-old recession that has put one in two Argentines in poverty and left 18 percent unemployed.

Brazil's economy, South America's largest, turned sour last year amid investor concerns that its new leftist president might implement policies that could lead to a default on the country's massive foreign debt.

Since taking office Jan. 1, President Luiz Inacio Lula da Silva has pleased markets by filling key economic posts with moderates who say Brazil won't adopt unorthodox fiscal changes.

Silva's aides have pledged to fight inflation, and Brazil's central bank continued that course Wednesday by raising the benchmark interest rate to 26.5 percent from 25.5 percent.

But the Brazilian economy still struggles because of the war fears, with experts warning its condition will deteriorate if fighting begins.

The war talk is already hurting some Brazilian companies. Shares of Embraer, the world's fourth-largest commercial aircraft maker, slumped last week after Houston-based Continental Airlines' ExpressJet regional carrier delayed deliveries of new planes.

And Brazilian moving company Granero Transportes was forced to cut costs because Brazilian businesses and families are nervous about moving, marketing director Julio Pires said.

Besides higher gas costs for its fleet of 1,000 trucks, the price of cardboard boxes Granero uses rose about 45 percent in recent months. The company cut 30 jobs from its 1,000-employee work force, parked some trucks, and reduced spending on advertising and maintenance.

"We're in the cascade effect right now," Pires said. "When gas goes up, everything goes up. If it wasn't for the threat of war, the economy would be improving, not getting worse."