Type to search

The U.S. Crisis and Latin America

There is growing concern about the U.S. crisis hitting Latin America, but also some good news about the region's overall outlook.


What a change a few weeks can make.  A little over two weeks ago - on September 19 - Brazils president Luiz Inacio Lula da Silva was asked about the potential impact on his country - Latin Americas largest - of the growing U.S. crisis. "People ask me about the crisis, and I answer, go ask Bush," Lula said. "It is his crisis, not mine."

By last week it had become Lulas problem as well. Even Venezuelan president Hugo Chavez, who had also initially dismissed the crisis as a U.S. problem, had to concede that his country would be affected. "This is a hurricane, or more than one hurricane, its a hundred hurricanes, he said last week during a visit to the Brazilian city of Manaus, where he was meeting with Lula and other leftist leaders in Latin America.

Stock markets from Sao Paulo to Mexico City took a hit. Bovespa, the Sao Paulo exchange, saw a weekly decline of 12 percent, its worst result in six years, while Mexicos Bolsa index had its biggest weekly decline in eight years, according to Bloomberg. Meanwhile, the MSCI index of Latin American shares had its biggest weekly decline in 18 years.

"The increase in risk aversion is reducing the appetite for cross-border portfolio and other capital flows into emerging markets," says Alberto Ramos, the senior Latin America economist at U.S. investment bank Goldman Sachs. "The region is facing an increasingly adverse external backdrop as heightened volatility in international financial markets and the ongoing global credit crunch trickles down to Latin America. This will lead to a deceleration of growth, a moderate deterioration of the current accounts, and possibly also weaker exchange rates as the balance of payments picture worsens."


So far, however, most experts are not changing their estimates for Latin Americas GDP growth this year, although they are seeing a slightly weaker one next year. Citibank, for example, predicts that Latin Americas economies will expand by 4.4 percent this year, the same as the International Monetary Fund predicted in April.  The fund will release its latest estimates and forecasts this week - on October 8. Citi predicts that next year, Latin America will have a combined economic expansion of 3.5 percent, or only 0.1 percentage points less than the IMF predicted earlier this year.

But experts like Ramos warn that Latin America will face a combination of challenges in the days ahead as a result of the global crisis. "As the risks besetting the global economy intensify and credit becomes more less abundant and more expensive both households and corporates in Latin America will slash some planned spending in order to increase precautionary savings," Ramos says.

That means postponing the purchase of big-ticket durable good items and corporations delaying some investment projects, he points out.  "FDI flows could also suffer in the months ahead as corporate cash-flows in developed countries are weakening," Ramos says. Case in point: Mexico last week shelved plans to privatize an airport, citing the U.S. crisis, while Costa Rican President Oscar Arias warned the countrys growth rate may halve as investment drops, according to Bloomberg.


And lower workers remittances due to the slowdown in the United States and Europe affects Mexico and the Caribbean economies particularly hard, Ramos says. Remittances to Mexico fell by 12.2 percent...

Keywords: Argentina, Brazil, Citigroup, Costa Rica, Emerson, Fiat, Goldman Sachs, Goodrich, Hilton, Inter-Continental, Mexico, Peru, Grupo Pomo, US Chamber of Commerce, Venezuela


To read this post, you must purchase a Latin Trade Business Intelligence Subscription.
Scroll to top of page
Begin Zoho Tracking Code for Analytics