The Economic Crisis in Latin America: A Spanish Viewpoint

By Daphne Morrison
April 24, 2009

Latin America’s relationship with Spain is marred by a troubled history, dating back to the conquest. But starting in the 1990s, a mutually beneficial economic partnership has emerged as Spain began exporting capital to the region and—in turn—Latin American labor flooded the European peninsula. “What Spain does is export capital to Latin America, taking advantage of privatization policies in the region in the last decade,” explained Enrique Alberola, the head of the International Economics Department at Spain’s Central Bank, noting that Latin America was the first target for Spain’s foreign direct investment in the 1990s.

Alberola spoke at the Dialogue on April 24, addressing the impact of the financial crisis on Latin America from the European perspective, with an emphasis on Spanish-Latin American economic relations.

Spain is a top investor in Latin America and second—to the United States—when it comes to investing in stocks. Until the crisis, the region was considered low-to-medium risk for investors. But in the 1990s, when Spain embarked on a campaign to internationalize capital and investment, it accepted risk as a necessary cost of doing business. “Internationalization means risk and exposure, but also the diversification of risk.”

Of course the financial crisis has changed the playing field. Now, most countries are considered medium-risk but countries like Venezuela and Argentina are high-risk designates, while Chile—a regional anomaly—remains safe. However worrisome this trend my look to some investors, Alberola argued that relative to the rest of the world Latin America is on par and, in some cases, out-performing other regions.

According to Alberola the financial crisis is, in essence, a binary. In its latent form—what Alberola coined the stage of “turbulence”—external finance dried up, deeply affecting the Spanish housing market. In an interesting twist, Latin America was initially shielded from the crisis so that as Spain’s economy started to deteriorate, profits from investment in Latin America offered the possibility of badly-needed capital in a time of crunch. In other words, Latin America was propping-up the Spanish economy. This situation quickly reversed, however, when the crisis exploded in late 2008 and Latin America—closely tied to the U.S. economy and dependent on remittances from both the U.S. and Spain—began to suffer.

Claudio Loser, a senior fellow at the Inter-American Dialogue, agreed with Alberola’s assessment—but, he added, “in spite of all the problems, Latin America is better prepared.” He quipped that while the United States is reeling form a financial system in peril, Latin America—which has a history of financial turbulence—is reaping the benefits of a relatively strong and steady banking system. This difference is due, in part, to tighter regulation and size—the Latin American financial system is among the smallest of any region in the world. But the Latin American economy is almost entirely dependent on trade and commodities. In essence, Latin America is not suffering a financial crisis but an economic crisis.

In his concluding remarks Alberola was optimistic that Spain would not retreat from investing in Latin America. Despite risk, Latin America enjoys a steady banking system compounded by the propensity to do well when commodity prices rise again. “It all hinges on how Latin America behaves going forward,” he said and added, “if Spain did well investing in Latin America, and Latin America does well going forward, then it will be worth doing again.”