Latin America Faces Up To Region-Wide Recession (Last updated 10:49 AM ET January 31)

By Axel Bugge BUENOS AIRES (Reuters) - The devaluation of Brazil's real currency has left Latin America facing its worst recession since the debt crisis of the 1980s, and economists warn the region's trial by fire is not over yet.

A slide of more than 40 percent in the real since it was allowed to float two weeks ago has been a stark reminder of the debt defaults, hyperinflation and economic mismanagement that led to the "lost decade" of stagnation in many Latin American countries in the 1980s.

Tulio Vera, head of emerging markets fixed income research at ABN AMRO, predicts a 0.6 percent drop in output for all of Latin America this year.

He estimates the last time there was a recession of such magnitude in the region was in 1983, when output contracted 2.6 percent. "That tells you it all, right there," he said of the size of the coming downturn.

Other economists and banks, such as SG Cowen Securities which sees a 1.4 percent regional contraction this year, are even more pessimistic and nearly all caution that forecasts are likely to be downgraded if the situation in Brazil, the region's largest economy, deteriorates.

"The last few years have taught us a few things about growth expectations in the aftermath of a major currency weakening. Almost without exception, the market has initially underestimated the downside," finance house Salomon Smith Barney said in a research note. "Should we expect any better performance for Brazil?"

So far, the most negative forecasters see Brazil's economy contracting around 7 percent this year, after growing around 1 percent last year.

But the country's situation has the potential to turn much uglier if its currency dives further, if there is a debt restructuring, a surge in inflation, more fiscal deterioration or a combination of these. So the impact on the whole region through loss of investor confidence and higher rates could still become much worse, economists warn.

"The economic fate of Brazil and the region for 1999 hangs on how (Brazilian) macroeconomic stabilization pans out," SG Cowen Securities said in a research note last week.

Unlike the 1995 "Tequila crisis" following Mexico's devaluation, when only two of the region's major economies -- Mexico and Argentina -- contracted, this time three are seen tipping into recession -- Brazil, Argentina and Venezuela.

Argentina's economy could contract about 2 percent in 1999 after growing 4.5 percent last year, while oil-dependent Venezuela is seen contracting 1.8 percent, deepening its 0.5 percent decline last year on continued low oil prices.

Brazil saved Latin America from a regional recession in 1995 thanks to growth of 4.2 percent linked to the then newly-introduced inflation busting real currency.

This time around, Mexico is seen scraping by with growth of about 2 percent, after recording 4.6 percent growth in 1998, as it continues to benefit from close links to the booming U.S. economy. Chile is also seen growing about 2 percent this year.

Even if 1999 will see one of the worst recessions on record for Latin America, analysts say the region's governments will not turn their backs on the sweeping free market reforms of the 1990s, which took such effort to introduce.

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This is the IGNORED economic context of Y2K. South America will not be pulled out by mere loans from the IMF. It is the UNDERLYING problems that ned to be addressed and will NOT be addressed as always.

The licentiousness of easy credit and bad banking practices has pushed them to the brink. Now they will pay for the foolishness. And it won't stop there. It will continue to spread from Asia to South America to Europe and then to here.

And then Y2K kicks in.

And you are all sitting around thinking that you don't need to prepare. All teh guys warning you have an evil agenda when the ask you to make it safe for your family. They are evil pernicious people who so badly 'want' to see you harmed that they spend so much time trying to warn you.

This is the hallmark of an evil-doer himself. All evil-doers ask you to provide for the safety of your children by getting them to a safe place and having enough food for them.

http://nt.excite.com/news/r/990131/10/business-latam

Paul Milne If you live within five miles of a 7-11, you're toast.

-- a (a@a.a), January 31, 1999

Answers

Let's not forget that subtle irony may not always be correctly understood by novice readers here... with confusion as a result.

-- Tom Carey (tomcarey@mindspring.com), February 01, 1999.