Latin America weathering Iraq war well
By Bradley Brooks <a href=www.upi.com>UPI Business Correspondent From the Business & Economics Desk Published 4/8/2003 2:35 PM
RIO DE JANEIRO, Brazil, April 8 (UPI) -- Bombs fall in Baghdad, bonds rise in Brazil?
To the surprise of many Latin America watchers, the region's biggest economies -- forecast to be among the globe's hardest hit by a war in the Middle East -- have seen a resurgence in activity.
Spreads on bonds -- a measure of investor confidence -- have narrowed, local currencies are rising against the dollar, and in some cases there have been rallies in equities since the Iraq war began March 20.
Emerging market bond funds took in $948 million -- a record inflow -- in the first quarter of this year, according to a recent report by Emerging Portfolio.com, which tracks 171 dedicated emerging market bond funds globally.
That translates into an 11.4 percent gain in total assets for those funds in the first quarter, and Brazil has been right at the top in attracting investors, analysts say.
"In the inevitable emerging market portfolio manager's search for valuations, Brazil certainly looks compelling," said Brad Durham, research director at Emerging Portfolio.
"It is the (lowest) valued emerging market in the world, at about five-times the forward looking price to earnings ratios."
The biggest reason Latin America is faring well during a time of conflict is that the expected sharp rise in oil prices briefly came and went once coalition forces secured oil fields in southern Iraq, analysts say.
Brazil and Chile, South America's biggest and its most stable economy, respectively, were thought to be most vulnerable to a spike in crude prices. Both have chugged along nicely since.
Additionally, analysts say that while it might be early to sound the all-clear, risk aversion on the part of emerging-market investors hasn't risen too much since the war began.
"It's related partly to a long period of neglect by investors," said Durham.
The Economic Commission for Latin America and the Caribbean, or ECLAC, a U.N. think-tank, said Tuesday foreign direct investment in the region dropped for the third year running in 2002.
Investment plunged 33 percent of $56.7 billion, down from $84 billion in 2001, ECLAC noted. The net inflow of FDI into Latin America was less than 2 percent of gross domestic product.
ECLAC -- which didn't include in its report a forecast for 2003 -- blamed the weak FDI on a global fall in equities, as well as the political troubles in Argentina, Venezuela and in the run-up to Brazil's election last October.
While unstable equity markets shouldn't necessarily have a damning effect on the region's bonds, when it comes to emerging markets, investors tend to generalize between asset sectors, analysts say.
That plays into the investor neglect Durham notes.
Brazil, he says, is an extremely high-beta country, meaning that when emerging markets are up globally, it outperforms them, and when markets are down, it falls harder than the rest.
"But I think sentiment has been so bad for so long for Brazil that it may be somewhat resilient in the current climate, if the government stays the course," Durham said.
Attractive bond yields have won out over potential turbulence in the eyes of investors socking money into Brazil.
The country's benchmark bond due 2014 has seen its spreads over U.S. Treasurys drop to 900 basis points of late as investors take heart in the new government's austerity.
Which has been a rather quick turnaround for Brazil, which late last year had a higher country-risk rating than Nigeria.
Even in Argentina, still trying to recover from its default in December 2001, bond spreads have dropped by 10 percent since the war began in Iraq.
Investors there have been pushed by apparent progress on salvaging the country's banking sector and signs that Argentina is finally talking about re-scheduling its defaulted debt with foreign bond holders.
Further cheering sentiment in Argentina has been the final lifting of controls that saw citizens' bank accounts locked away from them for more than one year.
That has resulted in a Argentine peso dipping below 3 to the dollar for the first time in a year.
Brazil's Economy Minister Antonio Palocci tried to cool the optimism -- and thus the expectations -- saying Tuesday the new government has far to go before it escapes economic danger.
"What cannot be assumed is that the (austerity) measures we're going to take are no longer necessary, for example the tax and pension reforms," Palocci said.
"This is the risk, that we neglect our agenda."
Brazilian President Luiz Inacio Lula da Silva told citizens in an address on Monday that the austere measures being taken are painful, but ultimately worth it if they lead to economic stability and prosperity.
"We took tough measures which cost me sleep on quite a few nights: increase the interest rate and cutting spending. But the sacrifice so far has not been in vain," Lula said.