The shock waves spread to Latin America

A good way of reducing risk. Here we look at the economic prospects in Asia, the Americas and Western and Eastern Europe
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The Independent Online
Investors feeling their way back into Latin American markets will have had a distinct feeling of deja vu after the market turmoil. In December 1994 the region was hit by the devaluation of the Mexican peso, the so- called "tequila" crisis that knocked gaping holes in Latin American share portfolios.

By 1996 the picture was very different, with Latin American shares rising on average 19 per cent. Investors were persuaded that the enormous shift away from state-owned companies and family corporations towards privatised, market-quoted concerns meant that the economies were slowly coming to resemble those of the more industrialised world. So it was hoped that the region might be insulated from the worst effects of the mini-meltdown that had its roots in Asia's economic and currency travails. Latin America's economic ties with Asia are few; it accounts for only 4 per cent of Latino exports.

But there is uncertainty, and it derives from Wall Street. South America's markets are driven by liquidity and by Wall Street. There, many bigger Latin American stocks are bundled and traded as American Depository Receipts (ADRs). When Wall Street cracked, Latin American markets could not escape.

Curiously, Asia's currency troubles could help avoid a rise in US interest rates and a crashing US stock market. Devaluations in South-east Asia should lower export prices and help the low-inflation growth being enjoyed in the US. Most analysts, for example, do not believe the US Federal Reserve (America's central bank) will raise interest rates in the foreseeable future.

But financial crises in one place focus the minds of investors and speculators on similar ailments in other economies. The problems of Thailand and its neighbours have centred on factors such as managed exchange-rate regimes, large current account deficits and banks guilty of careless lending.

Brazil is the Latin American country that looks most similarly placed. It has an overvalued currency and a current account deficit moving above 4 per cent of GDP, a big budget deficit and the looming uncertainty of a presidential election.

However, privatisation revenues and substantial foreign direct investment should cover a large portion of the current account deficit. And Brazil has limited bank credit expansion by very high interest rates.

The banks are healthy enough to cope with any quick, sharp rise in interest rates needed to resist a speculative attack on the currency. However, the stock market falls have triggered large capital outflows, which may herald higher interest rates and lower growth. Be warned; Latin America's markets are not yet out of the woods.