- The Washington Times - Wednesday, January 29, 2003

RIO DE JANEIRO, Brazil, Jan. 29 (UPI) — It's all Iraq all the time for Latin American equities as a sluggish week of trading and little market-moving news on the home front left investors to fret over the Middle East.

Analysts say that, should war come in Iraq, the fragile economies in Latin America will suffer a two-fold blow.

The first would be a spike in oil prices, the second a plummet in the amount of foreign capital flows into the region.

The Iraq situation "is pretty much what is driving the markets," said Jeff Noble, a Brazilian equities strategist with BBV Banco in Sao Paulo.

"There is a global move to risk aversion, which I think is hurting the markets — even Mexico, which is considered in a much more healthy and reliable situation than Brazil is."

In Brazil — Latin America's largest economy — Noble said the past week saw a combination of not only risk aversion because of Iraq, but profit-taking on the part of smaller, local investors after stocks shot up following the inauguration of President Luiz Inacio Lula da Silva on Jan. 1.

"There was profit-taking combined with the fact that that there was overall risk aversion coming through pretty much on the back of Iraq," Noble said. "In our view there was a little bit too much euphoria priced into the market."

With Argentina's debt rollover deal with the International Monetary Fund out of the way and Lula's honeymoon coming to a close in Brazil, there is not much good news on the horizon for investors to digest.

"You will see the market trading flat, there will be a vacuum of positive news for a few months," Noble said. "There is going to be very little to chew on — it will mostly be speculative."

The biggest domestic speculation for Brazil revolves around pension reforms — the first big political hurdle Lula will face.

A generous pension system — especially for civil servants — is a worrisome burden for Brazil and its $240 billion in debt.

Former Brazilian President Fernando Henrique Cardoso tried for years to push through pension reforms — only to be blocked by Lula's Workers Party in Congress.

Some analysts say that perhaps, now that Lula is in power, he can bring the Workers' Party legislators around and get reforms passed. Others forecast that the issue will remain mired in the political mud for the foreseeable future.

That problem aside, Lula and his economics team continue to flash moderate signals to the market.

On Wednesday, Finance Minister Antonio Palocci said he will unveil next week Brazil's new primary budget surplus target.

The country must have a surplus that runs at least 3.75 percent of gross domestic product to retain its $30 billion IMF loan deal.

Analysts widely expect Palocci to set the new target somewhere between 4 percent and 4.5 percent of GDP, which would please the market and demonstrate some appetite for austerity.

Meanwhile, over in Chile, Latin America's most stable economy, some economic indicators published Wednesday were positive, but nothing that had investors jumping with joy.

Industrial production for December rose 7.2 percent as compared to the year before. Unemployment dropped 1 percentage point to 7.8 percent for the October-to-December period.

But, like elsewhere, Iraq is keeping the lid on exuberance in Chile, a country that must import 80 percent of its oil and would be at the mercy of the price of crude should military action start.

As for the markets, Brazil's Bovespa ticked up 0.2 percent to 11,162 last Thursday — the first winner in six sessions — as the index tracked Wall Street. Steelmaker Acesita added 2.2 percent, while the world's largest iron ore miner, CVRD, dropped 3.5 percent on profit-taking.

Friday brought a loss of 3.3 percent, dragging the Bovespa to 10,783, its lowest point in four weeks. Analysts said the threat of war in Iraq spooked investors, as U.N. officials prepared to deliver a report on weapons inspections. Oil giant Petrobras lost 4.9 percent.

A strongly worded statement from U.N. inspectors on Iraq's unwillingness to comply spooked investors across the region Monday. The Bovespa lost 2.4 percent to 10,529. Long-distance carrier Embratel lost 12.8 percent, while Telemar shed 1.3 percent.

The Bovepsa lost slightly to 10,516 Tuesday. Investors were sidelined in anticipation of President Bush's State of the Union speech that might signal if war in Iraq is imminent. Petrobras lost 1.3 percent.

The index bounced 3.29 percent to 10,863 Wednesday as the Central Bank made a successful sale of government debt. Bargain hunters also moved into the market. Petrobras jumped 7.8 percent, Embratel climbed 6.88 percent and Telemar added 2.95 percent.

Mexico's IPC index ended last Thursday up 0.5 percent at 6,054. Wal-Mart de Mexico — or Walmex — led the day, gaining 2.8 percent. Spanish bank BBVA added 2 percent, while fixed-line phone giant Telmex fell 1.8 percent.

On Friday the index followed New York down, slipping 0.7 percent to 6,013. Mexico's peso hit an all-time low, souring investors. Brewer Modelo lost 2.5 percent, while BBVA gave back 1.6 percent.

Wall Street again led the IPC down Monday, as the index lost 1.5 percent to 5,923. The potential war in Iraq again led investors' concerns. Cement maker Cemex lost 2.5 percent. Walmex fell 1.7 percent.

The index closed nearly flat at 5,920 Tuesday as investors awaited President Bush's State of the Union speech. Telmex gained 0.4 percent. On Wednesday, the IPC gained 0.31 percent to 5,938. America Movil gained 1.45 percent, Telmex lost 1.75 percent, and Walmex gained 1.46 percent.

In Argentina, the Merval index closed flat at 568 last Thursday. Energy company Perez Companc gained 2.6 percent. Friday brought a 1.8 percent loss to 558, despite official word from the IMF on a debt rollover deal. Analysts said political worries ahead of the country's April elections weighed on investors. Perez Companc fell 4.16 percent.

On Monday, the Merval lost 1.7 percent to 548 in light trade.

Tuesday brought a gain of 1.5 percent to 556 for the index. Banking shares led the way as the government said it would issue bonds to banks as compensation for government actions that hurt the sector in the past year. Banco Frances added 4 percent, Grupo Financiero Galicia gained 3.5 percent.

The Merval ticked up Wednesday to settle at 557 in uneventful trade.

Chile's IPSA index dropped slightly to 1,004 Thursday in uneventful trade. Friday saw a loss of 1 percent to 994, as the index followed Wall Street down. Telecom CTC shed 1.8 percent.

Monday saw the IPSA down 1.2 percent at 982 as investors traded in line with New York. CTC lost 1.8 percent after reporting disappointing earnings. On Tuesday, the IPSA gained 0.7 percent to 989. Utility Enersis gained 3.3 percent after recent losses.

Wednesday brought a loss of 0.43 percent to 984 for the index in sluggish trade.

In Venezuela, the IBC rose 10.4 percent to 8,849 Monday in its first day of trading in almost two months, though the exchange is only open for half a day. A general strike has paralyzed the country, as protesters demand early elections or the outright resignation of President Hugo Chavez. National phone company CANTV gained 23 percent.

Tuesday brought a gain of 1.5 percent to 8,983. CANTV added 6 percent. On Wednesday, the index lost 3.26 percent to 8,690.

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