BUENOS AIRES—Things are bad but we’re doing well.” So former Argentine president Carlos Menem liked to say, just before his country plummeted into its worst financial meltdown seven years ago.
Latin America’s leaders appear to be slow learners. As finance ministers emerged from crisis talks in Brasilia yesterday, Venezuela’s parliamentarians voted themselves a 42% pay increase.
Yet the region’s stockmarkets are tumbling, international finance is drying up, currencies are depreciating and jobs are under threat. Latin America’s 579 million people have good reason to fear the worst.
“Latin America’s presidents are trying to reassure their people, but the global slowdown is already being felt,” says Lynne Walker, vice-president of the Institute of Americas, a San Diego-based thinktank.
In Brazil, the region’s largest economy, the value of the local Bovespa stock exchange has halved this year, while the currency has fallen more than 30% against the US dollar.
A freeze in liquidity represents the most immediate and worrying trend for the region, where average yearly growth rates have averaged 5.6% over the past four years.
As the world slides into recession, export orders are decreasing rapidly. For countries heavily dependent on US trade, notably Mexico and Central America, the pinch is hurting.
Major investment projects are also paying the price of tighter capital markets. Plans for a $6bn port project in Mexico, a $2.2bn cellulose plant in southern Brazil and a $1.5bn fast-speed train in Argentina are among those now stalled.
Add to that the decline in commodity prices and Latin America’s export-oriented economies suddenly look to be tottering on the edge of an abyss. The price of copper, for instance, a major factor in Chile’s stellar growth in recent years, recently slumped to four-year lows.
“Commodities like soya, gold, copper and oil have helped fund the region’s boom,” says Walker, who describes their recent decline as “very serious indeed”.
Oil dependency presents a stark example. Venezuela and Mexico respectively depend on oil for around 50% and 40% of their federal budgets. The maths is not difficult: a 50% reduction in the oil price, as has occurred since the highs of July, translates into a 50% reduction in government revenue.
Remittances are also down. In August alone, money sent to Mexico from the US fell by 12.2%, according to figures from the country’s central bank.
Reasons for optimism
It’s not all doom and gloom. Efforts to diversify the region’s economies are taking the edge off the crisis, says Rodrigo Sales, a Sao Paulo based analyst.
Latin American exports to the US have dropped from 57% in 2000 to 40% in 2007, figures from the Council on Hemispheric Affairs indicate. Over the same period, trade with Asia has increased from 4% to 20% of total exports.
“The fact that Brazil has diversified its exporting platform and isn’t dependent on one or two markets has been very helpful in terms of its position before the current crisis,” says Sales.
The Brazilian government has been quick to restore confidence as well, offering loans at market interest rates to companies that are unable to refinance debts due to depreciation of the Brazilian real.
Other countries have followed suit. In Colombia, for example, the Bank of Foreign Trade has issued a special credit option to try to encourage international loans.
Latin America’s foreign currency coffers are also looking healthier. The commodity boom has helped the region’s governments squirrel away $460bn in the past four years, according to the Inter-American Development Bank.
Not all the region’s policy makers have stuck to the path of prudence, however. Last week, Argentine president Cristina Kirchner announced the proposed nationalisation of the country’s $29bn private pension industry. The move sent local markets into a tailspin, wiping 27% off the value of the domestic stockmarket in a mere three days.
“In the case of Argentina the default flag is being raised,” warns David Duarte, Latin American economist at 4cast, a US firm of analysts.
Venezuela’s prospects are also looking shaky. Despite considerable foreign assets held by the state-oil company PDVSA, analysts question the liquidity of such investments.
Nor does president Hugo Chávez, Venezuela’s self-styled “21st century socialist”, show much political will to rein in escalating public expenditure — a measure many economists view as critical to resolving the country’s escalating balance of payments problem.
Colombia is also in the “at risk” category, according to Duarte. The market-friendly country is struggling with major current account and fiscal deficits. As a staunch defender of the US, however, it’s unlikely that multilateral lenders such as the World Bank will allow a key regional ally to fail.
“What we’re seeing is a pattern of countries such as Brazil, Chile and Mexico where prudent monetary and fiscal policies have provided them with the cushion to get by over the next couple of years,” says Duarte.
Then there’s the rest. The future for the region’s second-tier countries is less clear. Carola Sandy, a Latin American analyst with Credit Suisse First Boston, says: “The countries that had a weaker performance before are going to have a weaker performance in the future.”
But even those at the bottom of the Latin American heap aren’t in as much trouble as other emerging markets, says Sandy.
“It’s not that Latin America isn’t going to be affected by the credit crunch, but it’s going to feel it to a lesser extent than other emerging markets, such as eastern Europe,” she argues.
Lower external debt obligations, smaller current account deficits, steadier consumer spending, less exposure to US mortgage-backed securities and existing restrictions to international credit all stand Latin America in better stead than their developing country peers.
Earlier this month, the International Monetary Fund predicted growth rates of around 4.5% this year and 3.2% next year, down from 5.5% in 2007.
“We’re not telling our clients that Latin America is a disaster … And while there will be less foreign investment in the future, it won’t be zero,” says Sandy.
It’s hardly a ringing endorsement. But for a region shaken by constant booms and busts, it’s a verdict that many crisis-worn Latin Americans will be happy to settle for.
• This article was amended on Wednesday October 29 2008. The Institute of the Americas is based in San Diego, California, not Washington DC. This has been corrected.