Latin America: Braced For Tougher Times In 2009
In recent years, Latin American economies have benefited from booming US consumer growth, high commodities prices, and ample global liquidity, helping the region post an estimated average annual real GDP growth rate of 5.1% between 2004 and 2008.
Now, however, the tide is turning rapidly, and I am expecting growth to fall to 4.6% this year and to 2.8% in 2009, as the region comes up against some difficult headwinds in the form of a US consumer recession, commodity price deflation, and tighter access to external capital.
Latin America, Real GDP Growth (%)
The main risks can be summarised as follows:
• As the US current account deficit contracts, expect Latin exporters to see demand for their goods shrink (the US represents the main export destination for the eight largest countries in the region).
• Slowing global growth will continue to drag down raw materials prices, sharply reversing the positive terms of trade.
• Global liquidity will continue to dry up as US consumers save more and the dollar strengthens, making external financing harder to come by. Asset prices will continue to come under pressure.
Nevertheless, one thing is for sure: the region is in a much stronger position than it was at the onset of the last global slowdown in 2001. My own belief is that structural reforms and prudent, far-sighted monetary and fiscal policies, which have helped contain inflation and encourage investment, will not be easily undone. The rise in prosperity has also helped keep political risk in the background and maintained support for sound economic policies. In turn, this has allowed sovereign risk spreads to narrow, allowing governments to pay off debt and strengthen their external balance sheets.
In contrast to Emerging Europe, external financing in Latin America’s banking sector remains only a small proportion of total bank funding and while I anticipate a rise in bad debts, I see little risk to banking sector stability in the region. Notwithstanding these positive buffers, external factors such as the improvement in terms of trade and increased global liquidity have undoubtedly greased the wheels of the growth boom. Now that the tables have turned, will Latin America be able to keep up the pace?