Capital Flows South

WHILE most Central and Eastern European economies are still in turmoil over political and social changes in the Soviet Union, stock markets in Latin America have emerged as the fastest rising markets in the world, according to the International Finance Corporation (IFC) and several private sources.The 1991 edition of the IFC's "Emerging Stock Markets Factbook" lists Venezuela at the top of the 1990 list, with an impressive 572 percent increase, followed by Chile, up 31 percent, and Mexico, up 25 percent. (In the case of the latter, the figure differs with estimates made by Mexico Service, a US-based investors' counseling service, which placed the Mexican Bolsa increase at 50 percent in peso terms for 1990 and 37 percent in dollar value for the same period.) In Argentina, the Buenos Aires Stock Exchange has increased its volume of operations at least fivefold since Economic Minister Domingo Cavallo "dollarized" the Argentine economy and began implementing a new economic program in April. The reforms have reined in inflation at a record low level of around 1.5 percent a month. According to the IFC's factbook, the existence of a number of world-class companies in the developing world has become evident to investors since 1990. As an example, it underscored the fact that Latin American companies, particularly Mexican and Venezuelan, have raised almost $1 billion in debt and equity directly in industrial markets, which would have been unthinkable a few years ago. Mexico Service has attributed the Mexican Stock Exchange's successful performance during this year's first semester to "favorable developments on the financial and privatization fronts." At that period, the Bolsa index soared 50 percent and posted about 65 percent gains in dollar terms, cresting a record 1,131 points on June 6. The forecasting service also underlined the unexpectedly strong performance of Telefonos de Mexico's shares, which have been among the most actively traded stocks on Wall Street s ince their massive international placement last May. Chile, whose economy is among the healthiest in the third world, benefited not only from a longstanding stability but also from a 19 percent reduction in foreign debt granted this year. Venezuela's economy, for a decade virtually ignored by foreign capital, has seen market capitalization increase about 491 percent in dollar terms. From 1985 to 1990, the Venezuelan market returned 631 percent to its investors, with a five-year annual return averaging 35.9 percent through 1990. ARGENTINA'S tiny stock market, founded in 1854 and the oldest in Latin America, has been shocked by a sudden influx of foreign capital. Its operations, dormant for a long time, are now as lively as any in the traditional markets. Market capitalization has reached $5.7 billion and keeps growing. According to private financial sources, the average daily stock volume has grown from $309 million in 1986 to $852 million in 1990. With an average annual return of 26 percent, the Argentine market has risen an impressive 361.1 percent since 1986. In Chile, foreign investors have bought $866 million worth of shares in the last 12 months, and the price-to-earnings ratio climbed from 6 to 11, although in Argentina is still around 5 to 6. Economists point out that Latin America looks far more stable now to potential investors than any other area in the world, perhaps with the exception of Southeast Asia. After all, the region's 7.9 million square miles, more than double the area of the US, is rich in mineral and agricultural resources and increasingly open to large investment ventures. Venezuela's oil reserves alone - 58 billion barrels - surpass those of most of the volatile Middle East countries, while Mexico is still the fourth largest exporter of crude. Chile has a third of the world's copper. Argentina is a major beef and grain supplier to the world, but is also an emerging industrial power, bolstered by its new partnership in the Southern Cone Common Market (MERCOSUR). Although some Latin American stock markets have not risen to the same level as those of Venezuela, Mexico, Argentina, and Chile, the rebounding from a decade of economic stagnation is already attracting many US, European, and Japanese investors. Highly successful debt and equity investments, international debt issues underwritten by major banks or corporations, and similar financial projects are giving out signs of a confidence in Latin America as an investment area. Privatization, according to the IFC, will increase the size and liquidity of those markets. All indicators seem to point to one conclusion: Latin America already has become the new economic frontier for big investors. The unfavorable economic climate in the East and the emergence of the European Community as a new economic super- power that may rival the US have made many capitalists uneasy about possibilities to expand into those areas. In contrast, Latin America appears to have quieted down and be firmly on the path to economic transformation. As a sizable chunk of the world's economy - with a $900 billion combined gross domestic product (GDP), fairly stable democratic regimes, and a steady expansion of trade - Latin America is in the middle of a transition toward privatization that could finally transform it into an entirely new economic landscape. If that is the case, the long-awaited Latin American revolution may turn out to be more the offspring of peaceful economic changes and an influx of foreign capital than, as once believed, the result of blood and gunfire.