Home Topics Economy, trade & employment Latin American economy: ready for the tsunami

Latin American economy: ready for the tsunami

-

 

By Javier Farje, LAB

imf-logoThe IMF believes that the Latin America economy will continue growing in the next few years Greece is nearly bankrupt; Italy has such big debt that the European Central Bank does not have enough money to cover it; Ireland’s economic crisis caused the fall of the government; Spain and Portugal are brushing their caps in case they need to beg for a financial bailout; and, most important of all, the USA, the biggest economy in the world, is on the verge of recession. The front pages of almost every newspaper in the planet have devoted many headline column inches to the crisis that threatens to sink the economies of the industrialised world.

The International Monetary Fund has summarised this situation in the title of its latest World Economic Outlook: “Slowing Growth, Rising Risks”. According to its latest report on the state of world economy, things will get worse before they get better. The IMF predicts that global economic growth in 2012 will be 1% less than last year, on average, mainly due to the economic crises in Europe and the United States. Growth in the US will be slow and feeble for the next few years, whereas the rest of the developed world will experience a “weak and bumpy expansion”.

And yet, the prophets of doom of the IMF seem to have good news for Latin America. It is true that whatever happens in the developed world affects the developing one, but it seems that, this time, the region will be well prepared to withstand the bad times.

According to the IMF’s latest World Economic Outlook, Latin America experienced a fast economic expansion in the first half of 2011, thanks to “a vibrant activity in many of the region’s commodity exporters”. This expansion has started to slow down in the second half of the year, but not to critical levels. In any case, the economies of Central America’s and the Caribbean are growing more slowly than their Southern and Northern neighbours, mainly because of their strong dependency on the US market, as well as their high levels of public debt.

By the end of the present year, average economic growth in Latin America is expected to be 4.5%. This constitutes a downgrade of 0.1% in relation to the previous forecast, but it is still robust and sustainable. This growth is due to a good performance from the main regional commodity exporters. In the case of these exporters, growth will be above average: Argentina, 8%; Chile, 6.5%, Paraguay, 6.4% and Peru, 6.2%.

By 2012, the IMF predicts a lower growth (4%), due to a reduction in the export of commodities to other developing economies, mainly China, not to mention the struggling industrialised countries.

On the other hand inflation, an age old curse of Latin American economies, will stay at an average of a manageable 6¾ percent for the present year and 6% for 2012. This is mainly due to the fact that those countries more inclined to have high inflation – Brazil, Chile, Colombia, Mexico, Peru and Uruguay – have managed to control it and keep it low. Their central banks have increased interest rates to keep inflation down, despite the trend in other economies (mainly in Europe) to keep rates low, in order to fuel domestic consumption as a tool for economic growth.

Good omens with a warning

inflation_cartoonLatin America has managed to control inflationIn its stilted, formal language the IMF report is positive about the region: “Financial conditions have become to a certain extent more unstable with the increased synchronization of world markets and the growing global aversion to risk, but the impact on Latin America so far has been limited”.

Low inflation and sustainable growth are seen as the main barriers that will protect Latin American shores from the tsunami that is dampening the global economy. Also, public debt is low, compared with the Gross Domestic Product; and the local banks have enough liquidity and capital to endure a financial crisis. Unlike their counterparts in the developed world, Latin American banks did not risk their capital in high-risk investments, like the sub-primes in the USA and the acquisition of money-losing financial institutions in Europe.

Not everything, however, is rosy.

The US is in danger of going into recession and this will have a direct impact in Mexico, Central America and The Caribbean. And China’s slowdown could affect commodity prices. And here comes a warning: Latin America still relies on the exports of commodities as one of its main sources of income. Countries like Venezuela and Bolivia lack an industrial structure that would enable them to reduce their dependency on primary commodities and agricultural produce. If China, and indeed the industrialised world, experience a slowdown in their manufacturing sectors, this could potentially have serious consequences for commodity exporters in the region. However, the international financial institutions do not predict a radical shrinking of the Chinese economy. Augusto de la Torre, the World Bank’s chief economist for Latin America, believes that China will outgrow the developed economies in the foreseeable future. This means that commodity prices will remain high.

In any case, there are still vast disparities in the levels of economic growth within the region, and this poses a problem for the regional economies. Central America and the Caribbean have experienced modest economic growth, due, as we said, to the crisis in the USA. And, unlike Europe, Latin America does not have mechanisms to support those weak economies.

At the samdilma_in_the_UNPresident Dilma Rousseff to the developed economies: sort out your mess, or else…e time, Central American and Caribbean countries depend on monetary remittances from their citizens living in the USA and, to a lesser extent in Europe, for a considerable chunk of their incomes in hard currencies.

According to the Inter American Development Bank, between 2000 and 2008, remittances to Latin America increased an average 17% per year. In 2008, they grew by only 1% and in 2009, they went down by 15%! This is particularly serious in the case of Central America and the Caribbean. Remittances constitute 30% of Haiti’s GDP, 25.6% for Honduras and 18.7% for El Salvador. Furthermore, a weak dollar diminishes the purchasing power of the recipients of this vital source of economic relief. If the United States falls into recession, it is likely that the remittances will also fall even more than now.

All in all, Latin America is well placed to resist the upcoming global crisis, to such an extent that even a regional leader, the Brazilian President Dilma Rousseff, had what would have been considered a temerity some years ago, to lecture the developed world on the need to solve the current economic crisis. In her speech before the UN General Assembly, Rousseff said the current upheaval was caused by “a lack of political resources and clarity of ideas” and demanded the replacement of “outdated theories from an old world with new approaches from a new world”. She warned about the political and social consequences of the current emergency and demanded once again reforms in the IMF and the World Bank so the emerging economies are given the role they deserve. The question is: will they listen?