Fitch: "The Party's Over" for Latin America

By Paul Wander
January 29, 2009

Listen to an mp3 audio recording of this event.

Latin American countries may be better positioned to withstand this year’s worsening global economic conditions than in the past, but analysts at an Inter-American Dialogue round table discussion on January 29 said that the depth and duration of the current crisis will be strong enough to undo any positive trends and expose weaknesses in several economies in the coming period.

Theresa Paiz Fredel and Shelly Shetty, both of Fitch Ratings, and Nora Lustig, of The George Washington University, painted a dire picture for Latin America in the coming term, citing the effects of tight liquidity, falling commodity prices, and the global recession.

Economic growth reached most Latin American countries between 2002 and 2007, and as a result many countries are fairly well-positioned to withstand economic volatility.  The entire region reports $450 billion in total reserves, which can be tapped to lubricate credit markets and will provide a much-needed buffer to global recession.  

Historically, Latin American countries have had to borrow funds to use counter-cyclical fiscal policy tools, but Chile (and possibly Mexico and Peru) may have the reserves to cover these costs without extensive borrowing.  

Furthermore, the region is relatively closed to the global economy in terms of trade and investment.  While isolation is often harmful in times of worldwide growth, “It’s a good time to be closed,” Shetty said, citing several well-integrated regions like Europe and Asia that will be hit hard.    

Still, the current economic crisis will likely be long and deep enough to create the worst financial conditions in Latin America in decades.

The global recession has only begun to hit Latin America.  While the region grew at 4% in 2008, only 1% growth is expected for 2009.  Declining consumer confidence will inhibit domestic demand and trade should decrease across the board.  

International credit markets remain closed to corporations and banks worldwide, said Shetty, but in Latin America, the absence of credit has been exacerbated by already low savings levels and high risk premiums.   

Several countries are particularly vulnerable.  Fitch ratings for Argentina, Ecuador, and Venezuela have been historically volatile, and these countries, once buoyed by high commodity prices, will be hit with a “reality check” as prices of exports fall and fiscal deficits emerge.

The small, open economies of Central America and the Caribbean are also particularly exposed.  Lacking viable exports and struggling to find their place within the services market, these countries rely heavily on trade preferences from the United States and remittances from migrants abroad.  Both trade and remittances are expected to fall, leaving Central America and the Caribbean with little recourse to reconcile already high levels of public debt.

Lustig said the multilateral finance institutions must be prepared to help both the badly prepared and the smaller states implement counter-cyclical fiscal policy through targeted lending.  However, she noted that in an environment where liquidity is already hard to come by, the World Bank, Inter-American Development Bank, and the International Monetary Fund will be hard pressed to lend significant amounts to Latin America.