Latin America better girded for financial crisis
The region is affected by global downturn, but more prepared this time thanks to greater foreign reserves and less external debt.
Mexico City and Sao Paulo, Brazil
As leaders in Washington rushed to stem the growing financial crisis in the United States, Latin American leaders thought they'd be unscathed. Brazil's president, Luiz Inácio Lula da Silva, when asked what repercussions he expected at home, retorted, "What crisis?" Venezuelan President Hugo Chávez called it the "crash of capitalism."Skip to next paragraph
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A few weeks later, the tone has changed remarkably for a region heavily dependent on the international prices of minerals, crude oil, and food – all of which have taken a hit – not to mention remittances, tourism, and investment.
Mexico and Brazil, the region's two largest economies, spent chunks of their federal reserves to stem unexpected currency declines. Mexico introduced an emergency stimulus package, while Brazil offered $2 billion in loans to exporters through local banks. The era of uninterrupted economic growth and fiscal surpluses, it seems, could be on the wane.
Yet even as nations await the full impact of a crisis that is reaching every corner of the world, Latin America is better placed today to weather the downturn than at any other time in the past half century, says Gray Newman, senior Latin America economist at Morgan Stanley in New York. Countries in the region have, overall, kept spending within budget and built up their currency reserves. Many have solved external imbalances and adopted flexible exchange-rate systems.
"Faced with a global downturn the region's largest economies are likely to face a relatively normal business cycle rather than a fully fledged crisis," says Mr. Newman. "That is good news and represents a graduation from the past for some countries in the region."
Still, the region will have to readjust after years of steady growth. Average annual growth rates across Latin America – at 5.1 percent from 2004 to 2008 – are expected to fall hard, with expectations for next year at just 2.8 percent, according to Rahul Ghosh, head of Latin American country risk and financial markets at Business Monitor International in London.
Commodities prices are a key reason. The metals, grains, and livestock that South America sends around the world, particularly to China, helped push Latin America to five years of unstinting growth. Trade surpluses that averaged almost $100 billion a year between 2004 and 2008 are likely to fall to around $23 billion next year, according to a Morgan Stanley report.
The nations that have worked to get their economies in order – such as Brazil, Chile, and Peru – are among the best placed to keep growing next year.