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Latin America: Prepared for Crisis

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Generally, Latin America was well prepared for this crisis, Wharton experts say.

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Latin America, which is typically a casualty in global financial crises, has managed to keep itself afloat this time. According to Juan Carlos Martínez Lázaro, professor at the IE Business School, Latin America finished 2008 with a growth rate of more than 4 percent. The first part of the year was very strong as a result of record-high prices for raw materials, making up for the sharp declines during the second half of the year.

However, 2009 is going to be hard for Latin America, which will not be able to totally escape the global economic problems, says Martínez Lázaro. He predicts that the region will suffer the impact of the global downturn in several areas: manufacturing exports, remittances from workers living abroad, investments and financing. Some countries will suffer more than others.

EXPORTS FALL

Exports of raw materials will be affected by dropping prices amid declining global demand. Exporters of petroleum, including Venezuela, Mexico, Peru and Ecuador, will suffer the most. Chile, one of the world's largest exporters of copper and molybdenum, will see a drop in its export revenues and lower investment in new projects because of declining tax revenues, says Juan Carlos Guajardo, executive director of CESCO, Chile's center for research on copper and mining. Central American and Caribbean countries will be net importers of raw materials.

Latin American manufacturing exports are also expected to decline, following lower demand from U.S. consumers. Remittances to Latin America will also drop, which will have a strong impact on Latin American countries that have a lot of immigrants working abroad, such as Mexico and Ecuador. In addition, Martínez Lázaro forecasts a drop in foreign direct investment in 2008 and 2009. "Fewer and fewer companies are committing themselves to new projects, and this will be felt in such countries as Brazil and Mexico, which attract the most investment in the region. However, it will also be felt in such countries as Peru and Chile," he notes.

Financing throughout the region is increasingly difficult and expensive. In Brazil, for example, Anita Kon, a professor at the Pontifical Catholic University in Sao Paulo, notes that "credit is increasingly scarce, interest rates continue to be very high and inflation will accelerate, given global conditions in which the supply of certain food products and other commodities doesn't meet demand. Brazil does not have enough savings of its own to finance the development and modernization of its infrastructure and manufacturing structure. It depends a great deal on externally financed loans and foreign direct investment."

INFRASTRUCTURE HURT

Large-scale public sector investments in infrastructure have already slowed and will do so even more in 2009, especially since tax rates are already very high and are in no condition to increase, Kon explains. Although Brazil has foreign exchange reserves that exceed $200 billion, she says financing currently depends on short-term capital speculating against Brazil's currency, the real, which will lead to a dramatic rise in the price of the dollar. "Brazil continues to be vulnerable, because it strongly depends on short-term speculative capital to balance its external accounts."

Meanwhile, Chile's financial system is relatively strong and its fiscal accounts are in good shape, according to CESCO's Guajardo. "Chile took advantage of the period of high prices [in raw materials] to reduce its debt to low levels, and to accumulate [foreign exchange] reserves of more than $20 billion, which will enable it to sustain an expansionary budget in the coming year."

As for the populist sentiment stirring in the region, Martínez Lázaro quotes Ricardo Lagos, former president of Chile, "who once said, 'It is easy to be a populist when your wallet is full.' We'll find out if it is so easy now to be a populist or become a demagogue." In his view, leaders such as Hugo Chávez in Venezuela and Evo Morales, in Bolivia are going to feel the impact of the crisis a great deal. Any possible deterioration in social conditions in other countries could also lead to more populism.

Generally, Latin America was well prepared for this crisis. "During boom times, they did their [macroeconomic] homework, so 2009 is not going to be dramatic," states Martínez Lázaro, adding that the entire region is going to grow more slowly, at about 2.5 percent. While growth will slow, he says, the region should not drop its guard. Latin America "can pursue a very stable macroeconomic policy and [also] reduce [social and economic] inequality. It would be a shame if [Latin America] loses its way moving down that road."

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

 

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