The mood in Latin America may be bright, but the clouds gathering on the horizon suggests that the party may soon be over.
BY WALTER T. MOLANO
A strange disconnect ran through the streets of Miami, as bankers, economists and policymakers converged for the annual Inter-American Development Bank (IADB) meetings.
On one hand, there was the rampant optimism of the Latin Americans. The buoyant economies of the region was reflected in the numbers of attendees and the figures that were projected on the screens. Brazilians, more than any other group, were emboldened by the strength of their currency, the depth of their markets and the tenacity of their corporations.
On the other hand, the mood among the North Americans and Europeans was somber. Many institutional clients were forced to skip the meetings, due to budget cuts and reduced travel allowances. The venues lacked the flair of previous years, when no cost was spared on entertainment and glitz. Moreover, many discussions focused on the depth of the global financial crisis, and the implications it had for the southern latitudes. As much as the Latins tried to revive the party atmosphere, there was a sense that it was all over.
There is no doubt that Latin America is well prepared to meet the current crisis. Finance ministers and central bankers revealed the vitality of their economies. The numbers are impressive. To begin, GDP growth remains strong. After peaking in 2007, with a growth rate of 5.3 percent y/y, Latin America should post a combined GDP growth rate of 4.6 percent y/y in 2008. At the same time, balance sheets are light. Debt levels as a percentage of GDP are half of what they were a decade ago. International reserve levels by the end of this year will be twice their levels in 2005. The region's current account balance will remain in the black through 2008.
This means that Latin America can increase its level of indebtedness for a while, without seriously impairing its creditworthiness. Fitch's decision to upgrade Peru to investment grade in the midst of the turmoil underscores the momentum of the region. Moreover, it is only a matter of weeks until Brazil gets the investment grade nod. Another important point is that commodity prices could hold up longer than we initially thought. The real slowdown in global demand will not be realized until later this year.
THE PERFECT STORM
Therefore, the collapse in commodity prices could be delayed, providing more current account inflows for the region. All of this should bolster the Latin American economies and help them weather the storm. Nevertheless, the eventual onset of the commodity bust will coincide with the start of the election cycle in Latin America, creating the perfect storm.
Although the Latin American economies are sound, the political systems are fragile. The political party system throughout Latin America was deeply debilitated by the wave of crises that plagued the region during the late 1990s, allowing for the proliferation of populist candidates. The traditional political parties in Venezuela, Ecuador, Colombia and Argentina
were decimated. Chile's Concertacion is in tatters.
Therefore, any candidate with popular appeal can move into center stage and hijack the national agenda. A downturn in demand and the start of the presidential electoral cycle could lead to further radicalization of policymaking. This already occurred in Argentina, Venezuela and Bolivia, and it could spread throughout the region. Therefore, the mood in Latin America may be bright, but the clouds gathering on the horizon suggests that the party may soon be over.
Walter Molano is head of research at BCP Securities.