SUNS  4355 Tuesday 19 January 1999

Buenos Aires, Jan 14 (IPS) -- Latin America is reeling from the shock of the 'samba effect' rolling out from Brazil's crisis. (Samba is a Brazilian dance)

Argentina+will find it hard to avoid a fall in exports and credit cost hikes, despite the experience earned in successive world crises and the improved solidity of its financial system.

Despite the epicentre being geographically closer this time round, economists, entrepreneurs and the government are looking optimistically at the economic variables, distancing themselves from events in Brazil.

The day after the hefty devaluation of the Brazilian Real, Argentina's Carlos Menem ratified the applicability of the monetary stability programme, stating there would be no recession nor devaluation of the Argentine peso, adding that Brazil will be over the crisis "in two or three days."

Meanwhile, the waves are rocking Mexico more heavily as the peso hit an all-time low with depreciation of 4.1 percent in a single day, and the capital's stock exchange fell 4.6 percent, the ninth consecutive dip, meaning no profits here yet this year.

Colombia's Bogota stock exchange fell 3.45 percent on Wednesday and 2.94 on Thursday with the Colombian peso losing a little ground to the dollar, while Ecuador is fighting hard both to avoid devaluation and stem capital flight.

Meanwhile, Argentine Economy Minister Roque Fernandez stated the impact here would not be so strong, although the Interior Ministry admitted the sale of 14.9 percent of State-owned shares in the YPF oil concern will be suspended until the worst squalls are over.

Vice-president Carlos Ruckauf was of a similar opinion, stating the situation in Argentina is unlike that of Brazil, above all due to the size and nature of the latter's foreign and national debt - 300 billion dollars of short-term expiry loans.

Ruckauf said Argentina would not need to modify its monetary policy and that the country is preparing to confront this crisis, despite the unavoidable increased cost of credit and cooling of the economy.

Argentina has run a currency board since 1991, aiming to keep the peso pegged to the dollar.

"The 1995 Mexican crisis found us in a poor position, but the following crisis in Asia came when we were better prepared to face it.

"This time, furthermore, the crisis in Brazil had been foreseen by everyone," said Ruckauf.
Since the establishment of the currency board, Argentina has survived an abrupt rise in US interest rates in 1994, and the "tequila effect" which followed hot on its heels - a knock-on effect of the devaluation of the Mexican peso which unleashed a crisis of confidence throughout the region.

As a consequence of the Mexican scourge, Argentina was the worst hit regional nation along with Mexico itself. Some eight billion dollars flowed out of the banks - almost 20 percent of total resources - tens of thousands of businesses closed and the number of banks fell from 205
to 158.

Economic growth, which had risen to seven percent per year of the annual average for the four previous years, fell back to 2.5 percent in 1995. Unemployment climbed to an unprecedented rate of 18.4 percent.

The crisis returned in July 1997, when the wave of devaluations occurred in Southeast Asia. By then the banking network was already more solid, the level of reserves backing the peso was high, and the main negative impact of the crisis was commercial as the prices of raw materials fell.

In July 1998, the sky darkened once again following the Russian government decision to declare a moratorium on its external debt and the devaluation of the rouble. The lack of confidence hit Argentina hand in hand with the first symptoms of the impact in Brazil.

Then this week, with the devaluation of the real adopted by the Fernando Henrique Cardoso government, alarm bells started ringing again, but, despite Brazil having the biggest economy in Latin America - and also being Argentina's trade partner in the Mercosur, calm was maintained amongst investors and entrepreneurs.

But according to former economy minister, Domingo Cavallo, the man behind the currency board, "the system is not going to fall apart nor will there be a financial crisis we are unable to confront," although he called on the business community to take care with their financial management.

For Mario Vicens, economist with the Macroeconomica Foundation, the worst possible scenario - a maxi-devaluation in Brazil - would push up interest rates in Argentina, making credit more expensive and shrinking economic activity.

The main sectors affected are the automobile, dairy and oil industries.
Argentina places 30 percent of total exports on the Brazilian market, and an economic crisis in this country will affect the flow of sales.

Demand for motor vehicles has fallen since 1998 and is not expected to improve during the first semester of the present year. And this tendency will not improve, indeed the reverse is more likely, meaning automobile factory owners are already keeping workers on obligatory holiday time.

However, auto industry leaders state they are optimistic despite this being a difficult moment. Half of all Argentine production goes to Brazil and a 20 percent fall in foreign sales is already anticipated
due to the recession there.

Some 35 percent of Argentina's oil exports take the same route. Oil prices fell 35 percent due to the international financial crisis in 1998, and Brazil's woes will undoubtedly accentuate this tendency.

Economist and consultant Carlos Melconian stated there was no risk at all of devaluation in Argentina, stressing that at present an increase is being seen in reserves and deposits in the banks - simply speaking, more fuel for the economy's fires.