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Optimism Rises in Latin America as Rates Fall


Falling interest rates in Latin America, even as U.S. rates have surged in recent months, are boosting confidence in the region's prospects for growth and stability in 2000.

After a stagnant 1999, economic growth in Latin America is expected to hit 4% this year. Analysts are encouraged that the political landscape is settling out after turmoil surrounding several crucial presidential elections, and there has been a general rise in prices of basic commodities on which most Latin economies depend.

What's more, the slide in interest rates, especially in Mexico, also is helping drive many Latin stock markets higher. The Mexican market, for example, has gained 12% this year, while U.S. blue-chip indexes have tumbled. The Argentine market is up 10.1% this year, and Brazil's main index has inched up 1.7%.

U.S. mutual fund investment in the region's stock markets is up 7% this year and at the highest level in two years, according to Merrill Lynch.

But for the region's economies, an improved bond market--and lower interest rates--packs a more beneficial wallop than stocks. The market value of Latin bonds is more than 10 times that of its stocks. Lower bond yields also bring immediate benefits to governments, companies and consumers by lowering the cost of borrowing, and therefore of living.

In Mexico the yield on 28-day day cetes, the government's benchmark treasury bill, have fallen to about 13%, a five-year low.

And yet, some economists see warning signs on the horizon. The inflationary impact of higher energy prices, and continued rate increases by the U.S. Federal Reserve, could cause Latin rates to turn upward sooner than later, jeopardizing the region's recovery.

"Has there been a return to normalcy? Far from it," said Arturo Porzecanski, Latin American economist at ING Barings in New York, who said the ability to borrow at a decent rate still is largely restricted to governments or to corporations that can somehow tout an Internet angle.

Said Larry Goodman of, an economic advisory firm in New York: "The region is clearly coming back. Yet the recovery is below potential."

Economists say inflation could soon rear its head in Chile, in particular, and they noted that Brazil is bracing for the effects of expensive imported oil. Brazil must import one-third of the oil it consumes.

For the moment though, investor confidence in Latin America is riding high, buoyed most recently by Tuesday's upgrading of Mexican debt by Standard & Poor's Corp. to a notch below investment grade. That piggybacked on the move by Moody's Investors Service last week giving Mexico full investment grade status.

S&P said additional upgrades of Mexican debt will depend on the next government pushing through changes in economic policy to reduce reliance on oil revenue and to open the energy sector to more private investment. Mexican voters will go to the polls to elect a new president in July.

Rating upgrades are positive signs for a country's long-term economic outlook and are expected to attract additional foreign investment in stocks and bonds, experts noted.

Long-term bond yields in Mexico have fallen with short-term rates recently, narrowing the gap with yields of comparable U.S. debt. The Mexican government's longest dated Eurobond, maturing in 2026, traded Wednesday at a yield of 8.84%, or 2.77 percentage points higher the 30-year U.S. Treasury bond yielding 6.07%.

Over the last year, Mexican long-term bonds have traded at yields as high as 5.10 points above U.S. Treasuries.

Mexican companies now are lining up to sell bonds to raise cash and refinance existing debt. Grupo Elektra, Mexico's largest electronics retailer and linked to the TV Azteca media empire, plans to sell $250 million in bonds next week. That follows the sale of $275 million bond sale last week by Maxcom Telecomunicaciones.

Still, most Latin corporations are being frozen out of the debt markets, said ING Barings' Porzecanski. Although year-to-date Latin government and corporate debt offerings, at $13.7 billion total, are twice the $5.5 billion raised over the same period last year, only 10% of that is corporate debt. In a healthy market, corporate offerings should be 30% of the total, he said.

Nonetheless, investors now see less risk in investing in Latin America and therefore need less additional return, or "risk premium" to invest, said Walter Molano, research chief at BCP Securities in Greenwich, Conn., an investment bank specializing in Latin America.

As a result, the interest rate "spread," or difference between yields on a basket of emerging-market bonds and comparable U.S. Treasuries, has narrowed to about 7.8 percentage points, down from 9.5 points in January and as much as 12.6 points last summer, according to a widely followed J.P. Morgan Emerging Market Bond index. That index is dominated by Latin bonds.

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