(1 August 2002) The grave crisis currently affecting the Argentine economy has had multiple effects on neighbouring countries, according to Current Conditions and Outlook. Economic Survey of Latin America and the Caribbean, 2001-2002, published today by ECLAC. For example, Argentine imports from these countries fell from US$6.5 billion in 2001 to about US$2.2 billion in 2002.
The magnitude of the Argentine crisis is a cause of serious concern in Latin America and the Caribbean. "In addition to its direct effects on the region's economies, it is also exacerbating the difficulties that the countries were already facing as a result of their own domestic problems and the series of shocks they have sustained in recent years".
In this context, "the greatest danger of all is that these disturbances could be transmitted to other economies. Contagion of this sort could trigger a systemic crisis in the region and perhaps even in other emerging economies. This threat is particularly serious because of the current fragility of the world's financial system," warns ECLAC. The problems confronting the Brazilian economy, since May of this year, confirm these concerns. There, the foreign currency market has been extremely volatile.
The crisis' repercussions for neighbouring countries have been numerous, affecting trade in goods and services, inflows of foreign resources and remittances from migrant workers, the banking system and the profitability of foreign companies with investments in Argentina and the region, as well as influencing the rising volatility in foreign exchange markets and economic policies.
Argentine imports suffered a "striking drop", calculated at around two-thirds during the first four months of 2002, influenced by the drastic devaluation and domestic weakness. This affected the countries of Mercosur and Chile, with Uruguay the most affected. During the first four months of this year, its goods exports to Argentina fell by 70% compared to the same period in 2001, a year that already registered a significant decline. Moreover, problems arose with export payments, when Argentine importers' funds were blocked and they lost all access to credit. Tourism from Argentina fell by half. The direct costs of the crisis are estimated at slightly over two percentage points of Uruguay's GDP.
In Brazil, despite the fact that the economy is three times larger than Argentina's and despite market diversification, the sharp decline in exports to Argentina caused sales of goods abroad to fall by almost 6%. In 2001, this country had bought 8.6% of Brazilian exports, almost one-quarter of its manufactured products, making it difficult to redirect these to other markets in the short term. Moreover, Brazilian exporters face difficulties in obtaining payment for sales made. Tourism was also very affected.
In Paraguay, exports to Argentina fell by around two-thirds during the first months of 2002. The unfavourable consequences of Argentine turbulence further worsened, combining with already existing domestic problems.
In Chile, the real sector of the economy saw bilateral trade in goods, tourism and the profits of Chilean firms with subsidiaries in Argentina affected. Although exports to Argentina represented just 3.2% of Chile's total in 2001, contraction during the first quarter of 2002 had a significant impact (-61.5%).
Remittances from migrant workers were also affected, particularly in the case of Bolivia and Paraguay, where these transfers represent around 5% and 2% of GDP respectively, with a significant portion coming from Argentina.
It is hard to calculate the effects of the Argentine crisis in the financial arena, because of the system-wide volatility that has affected emerging markets since 1997. However, the decline in capital inflows from international financial markets has been significant, making credit in Brazil and Uruguay more expensive, although Chile has not been affected.
In 2002, the situation grew worse because of problems facing foreign companies operating in Argentina. This not only discouraged investment in Argentina, but also other countries in the region. Investors' retreat partly reflects fears that other countries will begin to deteriorate due to contagion, and asset losses experienced by investors.
Similarly, financial system solvency was also affected. Large foreign banks - American, Spanish and those from other European countries - with subsidiaries in Argentina have been badly hurt by the crisis. Some Brazilian banks face difficulties, but the volume of activities is small compared to assets, thus allowing them to absorb their losses with no major problems.
In contrast, three Uruguayan banks with very high exposure in Argentina have experienced serious problems. During the early months of 2002, these events triggered the withdrawal of most foreign currency deposits made in 2001, which as a result produced a significant decline in Uruguay's international reserves. Similarly, inability to dispose of bank deposits in Argentina produced the temporary closure of a Uruguayan bank. Similar, although less drastic, effects, were felt in Paraguay, where one of the country's largest banks had to be intervened.
Finally, it is worth mentioning the impact on assets of the losses experienced by Argentina-based transnational companies, which could affect foreign direct investment throughout the region. The decline in European company assets was enormous, given their high investments in the country, especially in basic services, the oil industry, manufacturing and finance.
Throughout the region, the country most affected because of its investment in Argentina has been Chile, whose investment was worth around US$3.2 billion. Companies saw their share values fall by 12% in the weeks following devaluation in Argentina. Earnings fell from US$208 million in 2000 to US$114 million in 2001, and are expected to reach zero in 2002.
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