War fears permeate Latin American firms

www.bayarea.com Posted on Fri, Feb. 21, 2003 By Alan Clendenning Associated Press

SAO 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.

Fears of war

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 managed to maintain production and its 85-employee workforce only because of a spurt in exports to countries like 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, said company manager Luciana Pereira Lopes.

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 countries like Mexico, Chile and Brazil.

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

The economies of Brazil and Argentina were hit particularly hard last year. Mexico also suffered because its economy is so tightly linked to the United States, and 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 condemned one in two Argentines to poverty and 18 percent to joblessness.

Impact on Brazil

Brazil's economy -- South America's largest -- turned sour last year on 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 it will deteriorate if fighting begins.

Some speculate Brazil might have to return to the International Monetary Fund to seek additional funds beyond the record $30.7 billion loan program the IMF approved for the country last year. Others say Silva may have to make additional budget cuts, after announcing $3.9 billion in cuts earlier this month.

The war talk is already directly having an impact on some Brazilian companies. Shares of Embraer, the world's fourth largest commercial aircraft maker, slumped last week after a regional carrier for Continental Airlines 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, said marketing director Julio Pires.