Tuesday, October 07, 2008

Credit Crisis & Latin America’s Long Term Prospects

“Latin America: Set for Economic Cold?” BBC News
“Brazil May Buy Loans, Use Reserves After Market Drop” Bloomberg
“Chavez Says U.S. Slump Hits Like `Hundred Hurricanes” Bloomberg
“From Gleeful to Fearful in Latin America” NY Times

The credit crisis stemming from the U.S. has been called "worse than 100 hurricanes" by Venezuelan President Hugo Chavez. Brazilian President President Luiz Inacio Lula da Silva is also lamenting the effects of what he calls "the casino erected by the American economy.” He added, ``We did our homework and they didn't. Those that spent the last three decades telling us what to do, didn't do what they had to do. The crisis is very serious and so profound that we don't know how big it is.''

Analysts generally agree that Latin America’s growth over the last several decades has better equipped it to deal with the now global credit crisis. Notice that no Latin American banks have gone bankrupt. Part of this relative strength is due to Latin America’s ongoing and deliberate push to decrease political and economic reliance on the United States. However, leaders throughout Latin America question whether it will be possible to maintain the levels of development and economic growth that their countries have enjoyed in recent years.

The credit crisis affects Latin America on a variety of levels. We have all heard the saying, “If the U.S. sneezes, Latin America catches a cold,” to describe the close and sometimes detrimental connection of Latin America to the U.S. economy. However, the credit crisis threatens Latin America in more ways than through its economic connections with the U.S. While each country has its unique issues and is positioned differently, the following effects of the credit crisis have been felt by every Latin American country in some degree.

First, in most Latin American countries, encouraging both direct and indirect foreign investment is a principal strategy in their development programs. The credit crisis has severely decreased investor appetite for risk, which has lead many investors to pull out of Latin America to consider what they view as less riskier investment options in more developed markets.

Second, the values of Latin American currencies have fallen throughout the credit crisis for a variety of reasons, including waning investor confidence. The Brazilin real, which is largely considered South America’s flagship currency, has been hovering around its lowest point in two years. The Mexican peso just had a biggest weekly decline in a decade. Falling currency values reduce the purchasing power of everyday people throughout Latin America and also reduce the ability of countries to pay their existing foreign debts, because each Latin American country now needs more of their money than it did before to pay the same amount of foreign debt. This debt burden affects some countries more than others. Brazil and Mexico have significantly reduced their foreign debt burdens since the 1980s and 1990s, while Argentina remains mired in foreign debt and has less savings than countries Brazil and Chile, which put money away during their recent economic expansions.

Third, although Latin America has diversified its export base in recent years, its primary exports remain commodities. Commodity prices have fallen as money has become more expensive. Even if prices recuperate, the situation remains very volatile, which complicates leaders’ abilities to form longer term development plans for their countries.

Finally, remittances from Latin American workers abroad are a significant source of income for all Latin American countries, and a primary source of income for the countries with the most workers in the U.S., such as Mexico, El Salvador, and Guatemala. The growth of these remittances has dropped for the first time in decades as workers abroad have lost jobs due to the faltering economies in the countries in which they work.

On a slightly more positive note, the credit crisis seems to be accelerating Latin America’s growing regional identity. It also is encouraging some Latin American leaders to increase their focus on alternative investment sources in countries like China.

1)How will the credit crisis affect the political legitimacy of the most leftist leaders in Latin America, primarily Venezuela’s Hugo Chavez and Bolivia’s Evo Morales?
2)What changes to development and economic strategies might we expect to see in Latin America during and after the credit crisis?

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