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Latin America’s Outlook

The impact on Latin America of US presidential elections and the global credit crunch.

BY WALTER T. MOLANO

The outcome of the U.S. presidential election has important implications for Latin America. There will be winners and losers, depending on who wins the White House.


Mexico
and Colombia will be the obvious winners if Senator McCain wins.
With a well-articulated immigration plan and a willingness to step up the so-called war against drugs, Mexico will receive greater attention from Washington. The same goes for Colombia. The Arizona Senator’s willingness to visit Colombia in the midst of his electoral campaign was a clear sign of support for the Andean nation. A McCain presidency would work hard to ensure the ratification of the Free Trade Agreement, as well as a follow-on supplement to Plan Colombia.


Not surprisingly, the list of winners and losers will invert if Senator Obama
wins the White House. Cuba will probably be one of the biggest winners, given that the Illinois Senator favors re-establishing a dialogue with the Caribbean renegade. A more favorable relationship with Cuba would imply closer ties to its allies, namely Venezuela, Ecuador and Bolivia.


FALLOUT ON LATIN AMERICA


The global credit crunch is having a debilitating effect on Latin America.
Growth rates are being revised down, inflation forecasts are being raised and current account balances are deteriorating. After peaking in 2007, GDP growth rates are trending down. Latin America’s GDP growth rate is projected at 4.4 percent in 2008, after reaching a zenith of 5.4 percent y/y in 2007.


Current account surpluses are also shrinking, with the region slipping into
the red in 2008. Latin America should post a combined current account deficit of $5.5 billion in 2008 and a shortfall of $33.8 billion in 2009. Torrential levels of domestic demand are the main drivers for the erosion. The region is experiencing an unprecedented consumer boom, highlighted by large credit expansion.

 

The deterioration of the external accounts could be exacerbated by the decline in commodity prices. This could leave the region scrambling for foreign capital to reserves offset a decline in international reserves.


BUFFER


The good news is that Latin America reduced its debt loads and
increased its levels of international reserves during the liquidity and commodity boom. However, a prolonged downturn in North America and Europe could leave the region in dire straits, unless it takes measures to reign in domestic demand.


This will have negative political implications. After becoming
accustomed to world class living standards, Latin consumers, particularly the middle class, will not be ready to return to an atmosphere of austerity—which could mean the proliferation of populist leaders and heterodox economic policies. All of this spells dark clouds for the region as it approaches the next election cycle.

Walter Molano is head of research at BCP Securities.  

 

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