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Economic growth in Latin America may falter

Gil Blasque, finance director of Brazilian lamp and light bulb maker Sylvania do Brasil Iluminacao Ltd, was optimistic his country's economy had started to rebound -- until the US-led war against Iraq began.

"It's a great pity, because Brazil is heading in the right direction," said Blasque, whose company, an affiliate of US lighting maker SLI Inc, has boosted exports to the US since last year's devaluation of the Brazilian currency. "A short war might not have much impact, a long war could be very serious."

Last week's attack on Iraq threatens to stall recovery in Brazil and other Latin American countries, Blasque and other business executives said. Lower US demand for Mexican steel, Chilean copper and other regional exports and higher inflation from rising oil prices could reduce growth below the 2 percent forecast of the Inter-American Development Bank.

In Brazil, the war may thwart the government's plans to cut interest rates to help spur growth. Central bank President Henrique Meirelles last week said the bank might push the benchmark overnight interest rate above a four-year high of 26.5 percent to prevent a surge in inflation. New York oil prices, at US$28.63 a barrel, are 13 percent above their level of 12 months ago.

Chilean President Ricardo Lagos said last week in comments published on a government Web site that a long conflict in Iraq may cause "some type of economic difficulties," including higher inflation. Brazil and Chile are both net importers of crude.

Mexico, an exporter of crude, may be hurt by high oil prices, said Mexican Deputy Finance Minister Agustin Carstens.

"We can assume high income for the first six months of the year," Carstens said at this week's IDB annual meeting in Milan.

"But we have such an open economy that the slowdown of the world economy from the high price of oil affects" GDP.

Latin American economies are vulnerable to any drop in US confidence caused by the war because they are dependent on foreign investment inflows to finance trade, meet debt payments and steady currencies.

"War can dampen investor enthusiasm, increase a flight to quality," said Robert Graffam, managing director for the private equity Mezzanine fund at Darby Investments, which invests in emerging market companies and debt, primarily in Latin America.

For countries such as Mexico and Chile -- which depend on the US as their main export market -- economic growth is tied to continued overseas demand for their goods.

"The main concern about a war is that it may extend the drag on economic growth in major industrial countries and that would continue to have knock-on effects for trade in Latin America," said Jeffrey Schott, a senior fellow at the Institute for International Economics in Washington.
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