The End of An Asset Class?

Sep 1, 2001

Fund manager Mohamed A. El-Erian contemplates the future of emerging market assets in the aftermath of Argentina's crisis. Despite the gloomy outlook for the region, tighter fiscal policies, more transparent and market-compatible rules, improvements in debt management and greater international reserves now cushion most Latin American economies.

Mohamed A. El-Erian
What a difference 18 months can make. The consensus market view at the beginning of last year was bullish on Latin America. Brazil was growing again, having overcome its January 1999 crisis. Higher oil prices were supporting Colombia and Venezuela. Even market sentiment towards Argentina was improving, reflecting the hope that the newly elected government of Fernando de la Rúa would decisively overcome years of stagnation and deteriorating debt dynamics.

Today, market perceptions are far different. Argentina faces a significant probability of default and/or protracted economic stagnation. Other countries in the region are trying to cope with Argentine contagion. In Brazil, exchange and interest rates have overshot, and there is a growing risk that this deviation may get embedded in the country's debt structure, complicating an outlook already adversely impacted by the domestic energy crisis.

Meanwhile, Colombia and Venezuela face more challenging prospects...

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