Latin American economies from Brazil to Peru are rapidly slowing, prompting analysts to lower their growth projections for the region and raising pessimism about the fate of free-market reforms there.
Energy rationing and a sinking currency in Brazil, a debt crisis in Argentina, a threatened state of emergency in Venezuela and worsening economic prospects in Chile, Colombia and Peru all have analysts on edge and fearful about the economic direction the region will take.
Those free-market reforms--such as privatizing state-run businesses, lowering government payrolls and inviting foreign investment--are particularly vulnerable because they have yet to deliver the stability and growth so many nations had pinned their hopes on.
"If I was a Latin American politician I might be asking myself, 'How do I sell more of these reforms given the track record we have seen so far?' " said Michael Gavin, an economist at UBS Warburg in Stamford, Conn., and former chief Latin American research economist at the Inter-American Development Bank.
Latin American countries are gamely fighting the seemingly never-ending struggle to maintain their balance and restore confidence within and outside their borders. But many of the countries seem now to be at political tipping points, leaning toward a reversion to past statist policies that is making Wall Street increasingly nervous.
With economic instability still the rule in Latin America even after a decade of free-market reforms that were billed as precursors to maturity and strength, it's understandable that patience is wearing thin in light of widening income disparity and growing unemployment, analysts say. But some say the reforms haven't gone far enough.
"All these countries should look at their economies and ask why they aren't as efficient, modern and competitive as they should be. The reason is that most are still highly protected, bush-league economies that won't fully open up to international competition," said economics professor Steve H. Hanke of Johns Hopkins University.
Several Wall Street firms have cut their projected growth for the region by a percentage point or more since March when the outlook began to darken. (Consensus estimates are now between 2% and 2.5%.)
Mexico is the only bright spot--largely because the rest of the region is so bleak. Mexico faces serious political challenges in passing fiscal reforms and addressing rights of indigenous peoples, but foreign capital has poured in anyway, attracted by a strong peso, low inflation and high hopes for the reform-minded Vicente Fox administration.
What's gone wrong with the rest of Latin America in a year that was to have seen upward of 4% growth--the rate the region needs just to keep up with job demand resulting from population growth? The main problem has been a global slowdown from which Latin American economies are not immune.
"The world economy is an airplane with two engines shut off: the United States and Japan," said Arturo Porzecanski, chief emerging-market economist at investment bank ABN Amro in New York. "We are in a cyclical downturn that is hurting capital flows and prices of commodities on which Latin American economies depend."
Austerity Measures Slow Growth Further
The global slowdown has forced many countries to adjust by enforcing austerity measures such as cutting spending and raising taxes, which only slows growth even more, said Javier Murcio, an economist at Credit Suisse First Boston in New York.
But Latin America's economies have been rocked from within by a host of adverse developments in recent weeks:
* Argentina's economy is in danger of imploding from the weight of crushing debt, a problem made more serious every week by a shrinking economy. Tax collections in April fell a startling 9%, said Morgan Stanley & Co. economist Gray Newman, despite a new financial-transactions tax that was to have given the country some breathing room.
So far powerless in the face of a three-year recession, the government of President Fernando de la Rua is on shaky ground, having had three finance ministers since March.
The latest, Domingo Cavallo, has engineered a more than $20-billion debt swap to be floated this week that if successful could lower the government's annual debt costs by $4 billion and add much-needed liquidity to the economy, possibly stimulating growth, said Renato Grandmont, Latin American strategist at Deutsche Bank Securities in New York.
Walter Molano of BCP Securities in Greenwich, Conn., describes the swap as a "veritable time bomb for the next administration." But Hanke of Johns Hopkins said Argentina's moment of truth may come sooner, as early as next year, when the "debt noose tightens."
* Brazil has a full-blown energy crisis on its hands and will begin rationing electricity June 1 in a bid to cut consumption by 20% over the next six months. The rationing won't bother just consumers. It will hurt industrial output to the point Brazil will lose 1 percentage point of its growth this year, economist Porzecanski said.
The country also faces added political uncertainty with the expected resignation this week from the Senate of its former president, Antonio Carlos Magalhaes, a onetime booster of President Fernando Henrique Cardoso's sweeping economic reforms. Magalhaes may try to implicate Cardoso's inner circle--or even Cardoso--in a corruption scandal and in so doing bring Brazil's reform process to a halt.
Because of political problems and the crisis in Argentina, where 11% of all Brazilian goods are sold, Brazil's economy has wobbled in recent weeks. The Brazilian currency, the real, has lost 20% of its value against the dollar since the first of the year, making it the world's weakest after Turkey.
Moving Away From Free-Market Concept
Brazil's main stock market index is the worst-performing after Indonesia's, and its bonds have been the second weakest this year after Argentina's, Porzecanski said.
"So you have a series of events, all of them negative and all of them leading to higher country risk, leading to the currency depreciating fast," said Deutsche Bank's Grandmont.
* In an indication of Chile's possible disenchantment with more than a decade of free-market reforms, the government proposed Thursday a new spending plan to increase jobs to confront mounting unemployment, a move that would partially relieve the free markets of job-creating responsibility.
Chile has been hurt by Argentina's problems and by the recent drop in prices of copper, its largest export.
* Crippled by a de facto civil war that makes it an increasingly inhospitable environment for investment, Colombia is suffering from a stagnant economy and rising unemployment that are only compounding the social problems that led to the conflict. After the economy shrank by 4% in 1999, Colombia's output expanded 2.9% last year and with luck could repeat that tepid growth this year.
But analysts are increasingly pessimistic.
"The rate of growth is not sufficient to create the jobs needed to absorb the unemployed workers who have come to the cities to escape the violence in the countryside. So absent some kind of relief from the war, it's hard to see how that story ends up," said UBS Warburg's Gavin.
GRAPHIC: PHOTO: Brazil's President Fernando Henrique Cardoso at a recent ceremony. An energy crisis is only one of his economic headaches. PHOTOGRAPHER: Agence France-Presse