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Latin America's Slump-Prone Currencies Soar, Hobbling Exports

Jan. 13 (Bloomberg) -- Latin American central bankers are learning to be careful what they wish for.

In 2002, Brazil's Luiz Fernando Figueiredo was among the officials struggling to prevent their currencies from tumbling as investors pulled money from the region.

Four years later, Brazil, Colombia and Chile face the opposite task: stemming currency gains that are eating away profits of truck, wine and coffee exporters, slowing factory investment and braking economic growth. One of their dilemmas is figuring out how to contain exchange rates without reigniting inflation.

``Most countries in the region have no experience of trying to weaken the exchange rate,'' says Figueiredo, 41, who now runs Maua Investimentos, a $160 million hedge fund in Sao Paulo.

Five of the 10 top-performing currencies in 2005 were from Latin America. With many of the region's nations giving priority to braking inflation, central bankers are reluctant to print too much local currency to buy dollars or to reduce interest rates, both of which may spur price increases, says Henry Stipp of Threadneedle Asset Management in London.

``You either control inflation or the exchange rate,'' says Stipp, who helps manage about $5 billion in emerging market assets, including Brazilian bonds. ``You can't do both.''

For many in the region, the currency gains have shattered perceptions that the U.S. dollar provides a haven against inflation and devaluation. Brazil's real, for instance, has risen 74 percent against the dollar since falling to a record low in October 2002.

Mixed Feelings

Vera Cotti, a former corporate accounts manager at FleetBoston Financial Corp.'s Sao Paulo unit who now looks after her four-year-old daughter, says she has mixed feelings about the change. Three years ago, Cotti put her savings into dollar- linked investments. Since then, they have lost about 30 percent of their value in reais, she says.

``I, like most everyone I knew at the time, would never have imagined that our currency would strengthen so much,'' says Cotti, 36, a graduate in finance from the Getulio Vargas Foundation in Sao Paulo. ``It's a good thing for the country, though, that we have a stronger currency.''

Reductions in interest rates in Brazil and Mexico may brake or reverse the rise in their currencies this year. Brazil's slowing inflation will probably allow the central bank to keep cutting the benchmark lending rate, Rodrigo Azevedo, the central bank's monetary policy director, said in an interview in Hong Kong on Dec. 5. The bank has cut the benchmark rate to 18 percent from a two-year high of 19.75 percent in September.

Mexico Rate Cuts

Cuts in Mexico's interest rates will help push down the peso, which gained 4.8 percent in 2005, central bank Governor Guillermo Ortiz says. Since August, the bank has reduced its benchmark rate to 8.25 percent from 9.75 percent.

``Banco de Mexico is in a rate-cutting cycle,'' Ortiz said during a Nov. 29 meeting at the American Chamber of Commerce in Mexico City.

In Colombia, sales of pesos to buy dollars may lead to inflation exceeding the four to five percent rate the government plans for this year, says Sergio Clavijo, the chairman of Colombia's National Association of Financial Institutions and a former central bank director.

``Either the central bank lets the exchange rate float or they are going to be risking the inflation target in 2006,'' Clavijo, 50, says.

Commodities Exports

Currencies rose last year as surging commodities exports and investment from abroad caused money to pour into the region. The five that were among the world's 10 biggest gainers last year were from Brazil, Uruguay, Chile, Mexico and Colombia.

Brazilian central bank purchases of a record $21 billion, four times more than in 2004, and its sale of $16 billion of contracts that enable exporters to protect their revenue from gains in the real, didn't stop the currency from being the best performer in 2005 with a 14 percent increase against the dollar.

The value of Brazilian exports rose to a record for a fifth straight year, climbing 23 percent to $118.3 billion in 2005, as growing demand from China pushed up prices and shipments of the country's iron-ore and soybeans. Inflows of dollars were boosted further by Brazil's 18 percent benchmark interest rate, the highest of the world's 45 major central banks, which lured money from investors seeking higher yields than in Europe and the U.S., where the benchmark rate is 4.25 percent.

`Search for Yields'

``The low-yield environment in the richest nations is prompting a tremendous search for yields elsewhere,'' says Philip Suttle, head of emerging markets research at Barclays Capital Inc. in New York.

Colombia's peso rose 3 percent against the dollar in 2005 after an 18 percent gain had made it the world's second-best performer the previous year.

Confidence that President Alvaro Uribe, 53, will continue to reduce violence in the war-torn nation helped increase foreign investment there by 66 percent in 2004. Last year, London-based SABMiller Plc, the world's third-largest beer maker, purchased Bogota-based Grupo Empresarial Bavaria, South America's No. 2 brewer, for $5.6 billion. Colombia's benchmark stock index rose 125 percent in dollar terms in 2005.

The 2005 increase in the peso took place after the government imposed restrictions on transfers of capital, designed to discourage investors from sending money into the country for less than a year, and as the central bank bought $4.7 billion dollars.

Central Bank `Failed'

``The central bank has failed to prevent the peso from appreciating,'' Clavijo says.

Elsewhere in the region, Uruguay's peso last year gained 9.8 percent against the dollar, and the Chilean peso, buoyed by record prices for copper, the country's biggest export, rose 8.5 percent.

The gains contrast with what happened in 2002, when seven of the world's 10 worst-performing currencies were from Latin America. That year, investors sold Brazilian bonds, currency and stocks as Luiz Inacio Lula da Silva, who had once called for a default on the country's foreign debt, emerged as the leader in the race for the presidency.

In neighboring Argentina that same year, the peso fell 70 percent and the financial system went bankrupt in the wake of the country's default on $95 billion of bonds and the collapse of President Fernando de la Rua's government.

Record Low

In the first nine months of 2002, Brazil's real fell 42 percent to a record low of 3.949 reais per dollar. In a bid to stem the decline, the central bank sold $9.1 billion of reserves and Figueiredo, who was in charge of central bank monetary policy at the time, limited the amount of reais in circulation.

The same year, Colombia's peso fell 21 percent on concerns Lula's election would lead to a default in Brazil that would trigger capital flight across the continent, says Clavijo. The currencies of Venezuela, Uruguay, Mexico and Costa Rica also plummeted.

Since taking office in January, 2003, Lula, 60, has gained investors' confidence in Brazil's ability to keep up debt payments by keeping inflation and spending in check. In 2004, he cut the budget deficit by almost half to 2.7 percent of gross domestic product from 5.2 percent the year before. His policies brought down inflation to 5.69 percent in 2005 from 17.2 percent in the 12 months to May 31, 2003.

Still, Lula's success in using interest rate increases to stifle inflation came at the cost of less consumer spending and reduced investment by companies. In addition, manufacturers of goods for sale abroad have been hurt by the real's gains, which have made them less competitive with foreign producers.

Volvo Exports

For the Brazilian unit of Gothenburg, Sweden-based Volvo AB, the gain in the currency will lead to a 90 percent reduction in exports this year from 2005's levels, says Jorna Halonen, president of Volvo's truck unit.

``Brazil is not competitive anymore because the real is too strong,'' Halonen says.

Elsewhere in Brazil, Calcados Azaleia SA, Latin America's biggest shoemaker, said on Dec. 6 it planned to close a plant in the southern Brazilian town of Parobe and dismiss 800 employees to help trim losses caused by the real's increase.

Revenue of Colombia's coffee growers was reduced by 295 billion pesos ($129.8 million) because of the peso's gain in the crop year that ended last September, says Gabriel Silva, general manager of the National Federation of Coffee Growers in Bogota.

In Chile, net income of Vina Concha y Toro SA, Latin America's biggest maker and exporter of wine, fell 50 percent in the third quarter to 4 billion pesos ($7.71 million) as the rise in the peso trimmed export revenue.

Plant Closures

``It has an impact on any company that has such an important percentage of their income in a foreign currency,'' says Blanca Bustamante, Concha y Toro's head of investor relations. The Santiago-based company derives about half its revenue from exports.

Plant closures, less spending on factories and machinery, along with reduced price competitiveness with goods made outside the region means economic growth in Latin America will slow to 3.7 percent in 2006 from 3.9 percent last year, Credit Suisse First Boston said in a report Dec. 16.

In Brazil, the economy grew just 1 percent in the third quarter of 2005, its slowest pace in almost two years.

``There is a squeeze in manufacturing throughout Latin America,'' Barclays Capital's Suttle says. ``That's an inevitable outcome of stronger currencies and higher costs for materials.''

Argentine Inflation

In Argentina, central bank sales of pesos to stem gains in the currency caused inflation to accelerate. Since June, the central bank has bought an average of $46 million of U.S. dollars a day, pushing down the peso by more than 6 percent in five months.

The resulting increase in pesos in circulation helped fuel price increases that led to annual consumer price inflation of 12.3 percent in 2005, double the previous year's rate.

``To keep the peso stable they are channeling money into the economy,'' Threadneedle's Stipp says. ``The price they will pay is inflation eroding the value of salaries and discouraging investment in the country.''

LINK:

http://www.bloomberg.com/apps/news?pid=10000177&sid=aJiShWdNM20A

By NewBoy on Jan 14, 2006, 07:13 in Friendly Talkzone.

Gator says on Jan 14, 2006, 07:27:

Hold On To Those Dollars... boys, the south shall rise again. Lot's of street talk about the peso vis a vie the dollar

"Credidi pretio parvo emere et magno vendere tibi in animo fuisse!" .

0 funny, 0 helpful.

GringoinBucaramanga says on Jan 14, 2006, 12:57:

I got screwed jj_jp at msn.com
Ya i got screwed.
I purchased a condo for $52k.
Before I paid it off the dollar went from 3000 to 2200 pesos.
i ended up paying $62k for the darn thing.
I get $4000 a month to live on and if the dollar
keeps going down I may end up going back to the US to live.
Bucaramanga is one of the cheapest citys in Colombia.
I would not invest in the Colombia stock market,
If a new president did something stupid you could loose it all.
John

jj_jp@msn.com

0 funny, 0 helpful.