Latin America markets linked to US economy will suffer most

Finance and property markets in Latin America face difficult challenges as the global credit crisis spreads, a new report is warning.

Some Latin America’s banking systems may be strong enough to weather the storm because many have not invested significantly in the US market and their domestic financial markets are not as developed as those of other Western countries, says the report from the Council on Hemispheric Affairs, a US based independent research organisation.

However, restrictions on credit may prove to be the most immediate risk for the region. In addition, the fact that the region’s financial markets are small to begin with suggests a significant reduction in investment can be anticipated for next year.

‘Latin American countries have reacted differently to the current world financial crisis, with some calling for support from developed nations and others taking active measures to protect their financial standards against repercussions of the crisis,’ the report says.

‘It is interesting to note that Latin American leaders have in few days gone from preoccupation with the phenomenon happening elsewhere in the world to abject fear. There is a growing nervousness that once again Latin America cannot escape the consequences of the globalized financial connections that run through the United States,’ it adds.

Countries that are tightly linked to the US economy such as Mexico and Central American countries will be more negatively affected than those that are more diversified. Nations that are relatively more linked to other regions, like Argentina, Peru, and Brazil, will see a delayed impact, as long as China’s growth remains robust.

Colombia is one of the first to show that the global crisis is affecting investment. The Colombian government has issued measures to ensure the country’s banks can survive, and have taken measures to protect their foreign currency system from facing a collapse.

The Finance Ministry announced the creation of a special credit option at Colombia’s Bank of Foreign Trade, in an attempt to encourage loans, most of which come from abroad. And President Álvaro Uribe has pledged to maintain the level of foreign investment that has been very important for economic growth, thus preventing a deterioration of the local market.

Economic ties with Arab and Asian markets are being explored. The government is also approaching global banks to fund projects for the coming three years.

However, the report points out that every other Latin America economy will be looking towards the same sources of relief.

‘It is now clear that the stagnation of growth in the G7 countries and sharp deceleration in emerging Asia will have a negative impact on Latin American growth. In particular, growth in the region inexorably will decline from 5.6% in 2007 to 4.7% in 2008 and to between 2.8% and 3.8% in 2009,’ the report predicts.

Inflation is creeping up, energy and commodity prices have descended from the stratospheric highs of earlier this year, and increasing imports are menacing exports, threatening current account surpluses, it concludes.