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Latin American economies hang on amid war

By BRADLEY BROOKS, UPI Business Correspondent   |   March 24, 2003 at 5:10 PM   |   Comments

RIO DE JANEIRO, March 24 (UPI) -- Latin America's fragile emerging economies are weathering the economic shock of war in Iraq, but analysts say that a prolonged conflict could soon take a toll.

Top U.S. officials and multilateral organizations have been active in the past week, trying to bolster the region's move toward economic reform and letting it know it's not forgotten, despite war in Iraq.

"There may be a perception that in Washington we're focused elsewhere," Randy Quarles, assistant U.S. Treasury secretary for international affairs, said at an economic meeting in Italy over the weekend.

"We've been working hard over the last two years on implementing a hemispheric strategy that will help Latin America confront its challenges both in the long term and the short term."

But it's those short-term challenges that worry some Latin American analysts.

While currency and equity markets haven't seen drastic drops in the past week and have sometimes even risen, a prolonged war in Iraq could have an impact on oil prices and emerging-market investor sentiment -- and deal a hard blow to the region.

On Monday, Mexico's peso fell for the first time in four days as investors fretted that the United States might have become embroiled in a tougher conflict than it anticipated.

Mexico, which sends most of its exports to the United States, would probably be the exporting country hurt the worst should demand for Latin American goods drop during a longer war.

Late in the day, Mexico's peso had fallen 0.54 percent to 10.77 to the dollar. The currency has lost 16 percent in the past 12 months, hitting all-time lows.

However, Brazil's currency -- the real -- is holding steady at about its best mark in two months, with investors still betting that foreign direct investment will continue, despite the war.

The real gained 0.43 percent late Monday, sitting at 3.39 to the dollar. The real is up nearly 4 percent this year.

The Brazilian daily business newspaper Valor reported that domestic companies raised $1.6 billion through foreign loans and bonds in the past week alone, a trend that could strengthen the currency as demand for it rises.

But as U.S. forces encounter stiff resistance in their drive toward Baghdad, analysts are seeing gray clouds on the horizon.

"If there is a longer war, that could mean less demand (for Brazilian exports) in the United States and Europe," said Luis Lima, an economist with BBV Corretora in Sao Paulo.

"That could also mean a lowering of foreign investment in Brazil. The combination of these two factors could pressure the foreign exchange, while higher oil prices might increase inflation."

Lima said that would also force Brazil to maintain a high interest rate -- the benchmark rate is now 26.5 percent -- which would further dampen hopes for economic growth this year.

The one benefit of that, though, is that emerging-market investors have become more attracted to Brazilian bonds. The appeal of those high interest rates and the returns they bring are overcoming worries about the country's ability to weather the war in Iraq.

Helping bolster that sentiment, analysts say, are the continued signals of government austerity in Brazil, which has Latin America's largest economy.

President Luiz Inacio Lula da Silva -- whose election and past talk of debt moratoriums and scathing reviews of U.S. policies in the region spooked investors -- has pleasantly surprised market players with fiscal belt-tightening and business-friendly talk.

As a result, economists in Brazil now forecast 2003 inflation at 12.2 percent, down from earlier projections of 12.4 percent.

Enrique Iglesias, president of the Inter-American Development Bank, voiced his optimism for the region Monday during a meeting of the bank's board of governors in Milan, Italy.

"The immediate prospect for the world economy and for our region is one of uncertainties ... exacerbated by the complex situation of the Middle East," Iglesias said.

"Nevertheless, the economies of several countries in the region have begun to improve compared to the beginning of 2002."

According to Iglesias, if "international conflicts" don't worsen -- not a given, by any means -- Latin American could see growth of between 1.5 percent and 2 percent this year. Last year, the region's gross domestic product contracted 0.5 percent.

By 2004, Iglesias said, the region could be seeing growth of 4 percent.

© 2003 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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