BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
INTERNATIONAL -- LATIN AMERICAN COVER STORY

A Battered Brazil Is Bruising Its Neighbors


Last year, Eduardo Marso, owner of Argentine poultry producer Las Camelias, decided to boost investment in chick-hatching capacity, breeding barns, and processing lines. It made sense at the time. Argentina's economy was cruising along, and Marso's prospects for the next few years seemed rosy. But then came Brazil's Jan. 13 devaluation of the real, which instantly made the country's exports more competitive abroad. Now, truckloads of chickens from Brazil are streaming across the border and undercutting Marso's prices by nearly a third. "They're targeting my same market," frets Marso, whose French immigrant grandfather started the business in 1936.

From small Las Camelias, whose sales were $45 million last year, to Italian auto maker Fiat's local unit, scores of companies in Argentina have been jolted. Though Brazil's troubles are heightening investor wariness throughout Latin America, Argentina is by far the biggest loser. Trade between the two leading nations of the Mercosur group has increased five-fold in the last seven years, and Argentina sends 30% of its exports to Brazil. With the devaluation, Brazilian exports from chocolate to pharmaceuticals are surging south, and Argentine exports of cars, steel, and rice are plunging. As a result, economists who only six months ago expected Argentina's gross domestic product to rise 5% in 1999 are now saying it will shrink by 2% to 3%.

Other countries in the region have little trade with Brazil and may not feel a direct impact from Latin America's largest economy. But most are reeling from near-record low commodity prices. Mexico, expecting a 2% rise in GDP this year, would be able to grow faster if oil prices rebound. With copper at a 12-year low, Chile's GDP is expected to be stagnant this year, down from increases of 3.5% last year and 7.1% in 1997. Colombia and Peru are hurt by slumping coffee and metal prices, respectively. In addition to low oil prices, high interest rates and a budget deficit of 6% of GDP are punishing Venezuela's economy. As a whole, GDP in Latin America is expected to shrink by more than 2% in 1998, making it the worst year since the debt crisis of the early 1980s.

QUESTION OF SURVIVAL. But Brazil's turmoil could have longer-term implications for Latin America. Many regional leaders hope that a strong South American trade bloc led by Brazil can become an effective counterweight to the U.S. in negotiations on a Free Trade Area of the Americas, scheduled to begin in 2005. The volatility in Brazil, however, has raised questions about whether Mercosur can even survive. So far, Brasilia and Buenos Aires have smoothed over the differences and shown a willingness to compromise. Brazil has eliminated some export subsidies, while Argentina has refrained from taking unilateral measures to stop imports. But Argentine businesspeople and analysts believe that over the long-term, the bloc will not be able to withstand currency swings as big as Brazil's 35% devaluation. "This is Mercosur's biggest test yet," says Michel Alaby, a Sao Paulo-based trade expert.

Argentina's carmakers would agree. Production in January fell 45% from a year earlier, and exports plunged 53%. Fiat and France's Renault have temporarily laid off 2,500 and 1,200 workers, respectively. The cutbacks in the auto industry and related sectors such as auto parts and steel are expected to push unemployment from 12.7% to 15% this year.

Some businesses can increase exports to make up for losing ground to imports at home. But with demand in Brazil plummeting, they must search for alternative markets. Las Camelias, the poultry producer, is exporting chickens to China, Germany, Britain, and the Middle East. Steelmaker Siderar is trying to export to recovering Asian nations including South Korea, Thailand, and Malaysia. Regardless, Siderar has been forced to put a $1 billion expansion plan on hold and to cut $40 million in costs. With Brazil in the doldrums, Argentine companies will have to become increasingly creative and austere.

By Ian Katz in Sao Paulo and Beth Rubenstein Keaveny in Buenos Aires

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