'Submerging' Markets: Is There an End?

First Asia, then Russia. Is Latin America next?

Since Asia's financial crisis struck last year, and now Russia's economic tailspin, international economic observers have speculated that Latin America is ripe for its own meltdown. You've seen one "emerging market," the thinking goes, you've seen them all.

Yet a closer look at countries from Mexico to Argentina shows that most economies here don't merit the "domino-effect" speculation.

Sagging prices of commodities from oil to copper and coffee are important factors in Latin America, the region's economists and financial experts acknowledge.

Yet these observers also say the fiscal reforms, inflation fighting, and diversification most countries have stuck to since Mexico's 1995 financial crisis have left them stronger. Their economies are better prepared to resist international shocks and generally worthy of more international confidence than they are getting.

The problem is Venezuela.

Like the bad boy of the Latin American class, Venezuela has engaged in antics that are smudging its classmates' reputations, right or wrong.

Most Latin countries have made substantial progress in undoing the state-run, high-inflation, commodity-based economies that typified the region through the 1980s. But Venezuela - nostalgic for the wealth generated by the state-managed oil boom of the '70s - has dug in its heels against reform. "Our absolute necessity to reform is obstructed by what we Venezuelans call facilismo, the easiness" of life under a provident oil-rich state, says Pedro Palma, president of Heptagon, a financial services group in Caracas.

Once the Asian crash set off a downward spin in international oil prices, the doubtful stares now trained on the principal oil producer of the Western Hemisphere were inevitable. "When problems started in China," says Orlando Ochoa, an economics professor at Universidad Catlica Andrs Bello in Caracas. "Venezuela was highly susceptible to the international contagion."

Venezuela is expected to rack up more than 40 percent in inflation this year - more than 300 percent over the five-year term of President Rafael Caldera that ends in February. Recent efforts to control inflation with a tight money supply have left the currency, the bolvar, overvalued by at least 40 percent, international analysts say. National financial experts contend the overvaluation is less.

Failure to tighten a notoriously porous revenue-collection system is one factor in what could be a fiscal deficit of 5 percent of gross national product by the end of the year.

For every dollar drop in the average annual export price of a barrel of oil, Venezuela loses $1.1 billion. Venezuela depends on oil for more than 80 percent of exports. This year the country's coffers will lose about $5.5 billion, a drop that balloons the deficit and borrowing demands.

But that continuing dependence on oil contrasts with the diversification pursued by other countries in the region. Mexico, for example, has cut oil as a percentage of its exports from 80 percent a decade ago to about 30 percent today. Over the same period Chile halved the dominance by copper of its exports from 80 percent to 40 percent.

Most Latin countries have also pursued tough fiscal measures to bring deficits in line. Mexican President Ernesto Zedillo has unblinkingly ordered three consecutive budget cuts this year as oil prices have tumbled by more than one-third.

Problem under control

Brazil's fiscal deficit, topping 6 percent of GNP, is drawing investor attention and causing a drain on reserves. But Oswaldo Rosales, a regional adviser with the Economic Commission for Latin America and the Caribbean in Santiago, Chile, says Brazilian authorities "demonstrated an ability and willingness to manage" a similar crunch at the outset of the Asian crisis last October. Despite presidential elections this October, they are not softening up now.

Some Brazilian analysts speculate that the government could shortly unveil a new package of measures to increase government revenues and signal the government's readiness to address the financial crisis head on.

Even Venezuela should be able to resist over the short term the external pressures on the bolivar, analysts here say, given the country's international reserves and general liquidity, which is rivaled in Latin America only by Chile. "It's a complete misperception to place Venezuela next in line to Russia," Mr. Palma says. "Venezuela is not near any collapse."

The "perception problem," he and other analysts say, derives in part from the Caldera government's failure to communicate the country's financial reality to the world. The government took steps to rectify that Friday, strongly criticizing Moody's lowering of Venezuela's credit-risk rating Thursday. Officials also announced measures to further reduce public-sector deficit.

The wild card of elections

But behind the "perception problem" looms something larger - Venezuela's December presidential elections and the real possibility they could be won by a retired army colonel, Hugo Chvez. His failed coup attempt in 1992 is still his biggest claim to fame. With a populist speech that is playing well with the country's impoverished middle and working classes, Mr. Chvez and his leftist-oriented advisers rail against the traditional elite and demand a new constitution that many critics say could steer further away from market-oriented reforms.

All this suggests unstable times ahead for Venezuela, observers say, and if there's anything international markets don't like, it's instability.

Venezuela's uncertainty is already having some ripple effect in South America. Next-door neighbor Colombia, the country most closely intertwined with Venezuela's economy, effectively devalued its currency 9 percent last week in an effort to stave off further speculation.

Yet even though Latin America's economic integration leaves countries more susceptible to neighbors' weaknesses, it is also in the long run making for a stronger, more unified region, better able to withstand external shocks, observers say.

"Even with international crises like this, no one is talking about stopping this [reform] process," says Augusto Ramrez Ocampo, a former Colombian foreign minister in Bogot. "Our countries recognize it's the only way to achieve better-balanced relations in the world."