SELA assesses the Impact of the Asian crisis
in Latin America

Caracas, 19 March. According to a press bulletin put out today by the Latin American Economic System (SELA), the Asian crisis will unleash "a growing sense of mistrust of emerging economies, unfavorable perspectives for trade and soaring uncertainty regarding the possibilities for external market access."

A study prepared for SELA by two Latin American researchers at universities in France, closely scrutinizes the effects of the Asian crisis on the trade and finances of 7 countries of the region and concludes that Argentina, Brazil and Peru will be the hardest hit while Colombia, Chile, Mexico and Venezuela, in principle, "are less susceptible."

Having pointed out that the potential effects "cannot be treated as totally inevitable", the document explains that a good deal of the impact will be determined, to a great extent, by the economic decisions made in the region. The authors are quick to indicate that in most instances the governments have "acted swiftly making the necessary fiscal, monetary and trade adjustments."

The report entitled "Impact of the Asian crisis on Latin America", already distributed among the 27 SELA member states, provides a comprehensive analysis of the effects of the Asian crisis for the medium and long-term in seventeen pages. The report also proposes risk ratings following the criteria applied by international analysts.

Three types of trade setbacks were observed: drop in Asia’s demand, indirect effects derived from the slowdown of the world economy (for example, the dip in the prices of commodities) and the region’s loss of competitiveness vis-à-vis Asian products due to the devaluation of Asian currencies which entails lower export prices.

Notwithstanding the fact that Latin American trade dependency on Asian countries is relatively low (only 10.27% of the region’s exports are bound for Asia), a number of countries will feel the effects because of their extensive trade with Asia.

According to 1997 data provided by the International Monetary Fund, Chile, is at the top of the list with 38.12% of its total exports routed to Asia. Peru follows with 25.33%, then Brazil, with 15.28% and Argentina, close behind with 14.99%.

SELA notes that from January to August 1997, Latin American exports to Asia "jumped dramatically" and attributes this to purchases made by Asian countries that foresaw the devaluation ahead. Chile’s figures demonstrate the crashing effect the Asian crisis has had: in August 1997 Chile accounted for 40% of total exports to Asia and by September, that percentage had dropped to 34%.

To further aggravate the difficulties, raw materials (an important Latin American export category) saw prices begin a downward plunge in June 1996, only to be "further reinforced by the Asian crisis". The report informs that the products most seriously affected are copper and oil.

And to "further worsen trade expectations, external financing for 1998 is a question weighing heavily on the region." "During the final months of 1997, the flow of portfolio investments to emerging economies took a downturn." The region could well see a "drop in foreign direct investment" using as reference Japanese and Korean firms’ decision to postpone investment.

Perhaps the most crippling aspect is "the difficulty that Eurobonds are having to access the international market" (In 1997, Latin American countries accounted for 53 billion dollars in Eurobonds.)

SELA goes on to explain how the Asian crisis has made it necessary "to postpone several of the issues scheduled for year-end 1997 in a number of countries and to widen spreads", which for many countries represented tiered hikes ranging from 105 to 204 base points. The most affected were Brazil, at 204; Argentina, close behind at 197; and Mexico, with 148.

Using variables linked to domestic economic performance, the recent evolution in foreign currency exchange rates, and the level of vulnerability to external financing, SELA’s risk ratings place countries into one of four categories.

The first category corresponds to the countries least weakened by the crisis. Only one Latin American country, Chile, form part of this group, along with Taiwan, Hong Kong, and Malaysia.

The second category engulfs the "relatively solid economies that are, however, vulnerable due to the high levels of their external debts and the potential imbalances in their trade." China, Venezuela, Uruguay, Argentina, and Mexico correspond to this group.

The third of these groups is made up by the countries at the core of the crisis, namely Thailand, Indonesia, South Korea, and The Philippines, whose traits include the "sharp devaluation of the national currency and a level of external financial vulnerability that continues to be extremely high." "Obviously, there is no Latin American country in this group," adds SELA.

The fourth group is characterized by "diverse but in all cases important, macroeconomic imbalances, as well as poor financial credibility." Three Latin American countries (Brazil, Colombia, and Peru) fall into this group.

SELA concedes in times of crisis and widespread volatility these categories tend to mutate meaning they are "unstable and partially photographs the recent path of the countries comprised in this study."

Other variables likewise spurred by globalization and the interdependence of countries that eventually may need to be added to the ones already singled out are: "the systemic financial risk in developed countries could lead to worldwide illiquidity," just as "the increasingly emphatic drop in growth in industrialized countries would surely bring down the demand for raw materials." Undoubtedly, long-term deferred and indirect costs "are at least of the same importance as immediate costs."

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