(above) "No offense to the Greeks but I think your investment would be safer in Peru," President Ollanta Humala said last night during a Council of the Americas dinner in New York. Photographer: Andrew Harrer/Bloomberg

Markets Pound South America as Leaders Proclaim Strength in Face of Crisis
September 23, 2011 - Bloomberg

By Joshua Goodman and Katia Porzecanski

Leaders from South America came to New York this week to tout their combined economic strength in the face of financial turmoil in developed nations. They'll return home with their armor dented after investors dumped the region's stocks, bonds and currencies.

The presidents of Brazil, Colombia, Peru and Chile -- the region's four investment-grade economies -- rattled off a list of accomplishments in speeches this week while attending the United Nations General Assembly: record foreign currency reserves, falling debt levels and economic growth above 4 percent. While criticizing policy makers in Europe and the U.S. for acting slowly to address their debt challenges, they vowed to work together to protect their own economies from turmoil.

"No offense to the Greeks but I think your investment would be safer in Peru," President Ollanta Humala said last night during a Council of the Americas dinner in New York.

The MSCI EM Latin America Index extended a weekly slump to 14 percent, the most since November 2008, while the MSCI World Index lost 7.6 percent. In Brazil, the Bovespa stock index fell for fifth day while the real rebounded after the central bank sold dollars in the futures market for the first time in two years to stem a 17 percent tumble this month. Chile's peso rebounded from the biggest drop among global currencies as speculation the central bank will cease its dollar-buying program overshadowed copper's tumble to a one-year low.

Boost Coordination
Colombian President Juan Manuel Santos told investors yesterday that he and his Brazilian counterpart, Dilma Rousseff, discussed at the UN the need to boost coordination within South America. Resisting a global recession won't be easy, said Claudio Loser, a former International Monetary Fund official. Policy makers in many countries have less room to increase spending and slash interest rates like they did following the collapse of Lehman Brothers Holdings Inc. in 2008, he said.

"You can coordinate policies, but I don't think you can perform miracles," said Loser, who oversaw Latin America at the IMF from 1994 to 2002 and now runs the Centennial Latin America research company based in Washington. "If there is a deep shock, all the countries in Latin America will see a sharp decline."

While trade among South American nations has soared in recent years, together with cross-border deals like Chilean carrier Lan Airlines SA's planned takeover of Brazil's Tam SA, announced last year, the region is far more dependent on world demand for its raw materials.

'All About Commodities'
The World Bank estimates that net private inflows to Latin America surged $203 billion in 2010 from $57 billion in 2003 amid China-led demand for Chile's copper, Brazil's iron ore and Argentina's soy. In 2008, the Thomson Reuters/Jefferies CRB Index of 19 commodities tumbled 36 percent; so far this year prices are down 7.7 percent.

"It's all about commodities for those economies," Simon Nocera, co-founder of San Francisco-based hedge fund Lumen Advisors LLC and a former economist at the IMF, said by phone. "Prices are coming down in reaction to the slowdown in China."

Falling borrowing costs have been another underpinning of what the IMF in April called a "bonanza" for the region's economies. Average Brazilian dollar yields dropped to 4.71 percent from 6.46 percent since July 2008, while Colombian yields fell to 4.16 percent from 6.32 percent, according to JPMorgan Chase & Co. Average yields on Latin American corporate dollar bonds have fallen to 6.32 percent from 7.58 percent.

Forecast Maintained
Brazil, the region's largest economy and the world's second-biggest exporter of iron ore, has so far been little affected by the global slowdown, Rousseff said this week. The IMF maintained its forecast for Brazilian growth next year at 3.6 percent in a Sept. 20 report.

"But we know that our capacity to resist isn't unlimited," Rousseff told the UN General Assembly Sept. 21, the same day the real tumbled 4.8 percent to the lowest level in 15 months. "We're confronting an economic crisis that, if it isn't overcome, may produce a serious political and social rupture."

Peru's currency will probably rebound from a three-month low as central banks loosen monetary policy worldwide, spurring flows into the Andean country as investors hunt for yield, said Finance Minister Miguel Castilla. Peru will see "large" amounts of investment, leading to increased demand for the sol, he told the Bloomberg Mila conference in New York yesterday.

"Unfavorable external conditions may slow down some of those flows, perhaps, but the president is absolutely committed to keep the economy growing at fast rates," Castilla said.

Declining Budgets
While the IMF cut its forecast this week for economic growth in Latin America and the Caribbean, the region's economies are still forecast to expand 4.5 percent this year compared with 1.6 percent growth in advanced nations. Peru is expected to grow 6.2 percent this year and 5.6 percent in 2012, outpacing the rest of the region, according to the IMF.

Other regional strengths against a potential recession include record levels of foreign reserves and declining budget deficits. Peru and Chile are even running surpluses.

"I'm still bullish for the region," said Zeina Latif, a senior economist in Sao Paulo for RBS Securities. "There are some cushions now that weren't there before."

At Santos' urging, finance officials from South America have met twice since August to discuss ways to protect their economies. Developing countries should rely on "South-South cooperation" given the failure of developed nations to contain the global crisis, he said yesterday, adding that the Northern Hemisphere is "running out of ammunition."

Trade Barriers
While Rousseff at the UN warned against a return to protectionism that she says could deepen a global slump, Brazil has led the region in erecting trade barriers. Last week, it raised by 30 percentage points a tax on foreign-made cars in a bid to protect carmakers from a surge in imports from China and South Korea.

Should the real extend a decline this month, losing competitiveness will be the least of Brazil's worries. After rallying 46 percent from the end of 2008 through August, the real has tumbled 17 percent this month, more than any other currency.

In 2008, when the real slid 38 percent from a 10-year high in the span of four months, companies including Sadia SA, then the country's second-biggest food company, reported billions of dollars in losses on bad bets the currency would continue to rally. In July, the real strengthened even more, as 12-month foreign direct investment climbed to a record $72 billion.

The JPMorgan Latin American Index of currencies, which slumped 19 percent in 2008, has lost 10 percent this year. The MSCI EM Latin America (MXLA) Index of equities plummeted 53 percent in 2008, its worst year in at least two decades. The same gauge has lost 28 percent this year.

"We were not expecting this," Chilean Finance Minister Felipe Larrain told reporters in Washington yesterday referring to the peso's tumble, adding that until now the currency had been stable. "We are well-prepared, but not bullet-proof."

To contact the reporter on this story:
Joshua Goodman at jgoodman19@bloomberg.net;
Katia Porzecanski in New York at kporzecanski1@bloomberg.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.