Latin America Faces 'Remarkable Deceleration' in Growth
By Alfredo Coutino
Latin America Advisor, December 24, 2008
Originally published in the "Annual Predictions Survey" of the Dialogue's daily Latin America Advisor.
Latin America has shown a strong resilience to the international crisis. During 2008 the region's performance did not show major signs of deceleration. In fact, in the first half of the year, the region performed at a speed similar to that of one year before. It wasn't until the third quarter that countries started to show signs of moderation. In Argentina, Colombia, Mexico and Venezuela, activity showed more deceleration as a result of both weaker external demand and domestic restrictions. However, in Brazil, Chile and Peru growth either reaccelerated or remained strong, as a result of solid domestic markets.
Consumer prices continued to rise, although at a decelerated pace. High international prices of food and energy were responsible for an important proportion of the region's inflation rebound in 2008. However, there were countries in which demand pressures played an important role as in the cases of Argentina, Chile, Colombia, Peru and Venezuela. Even though central banks recognized the influence of imported inflation on domestic prices, they started an aggressive wave of monetary restrictions. However, the significant adjustment of international prices has improved the region's inflation prospects.
Financial markets have not escaped the wave of global contractions. Markets have been hit by the contagion effects generated by scared investors trying to find safer refuges, but not as a result of structural problems as in the past. Latin America's financial sector does not suffer from the same disease as in the US and Europe. In fact, the relative resilience shown by financial institutions is the result not only of their low exposure to risky assets but also of the higher standards of supervision and regulations maintained. Regional markets have been contracted, but losses have been lower than those reported in Asia and Europe. A few liquidity problems have been detected, but those cases are more related to wrong currency bets. In general, the region has been facing liquidity constraints but not solvency problems.
External accounts have started to deteriorate not only as a result of lower commodity prices but also due to the excess demand generated by a few economies running at overheating speed. However, countries have accumulated foreign resources enough to cover the incipient external imbalances and also to service their debt. In fact, the region now stands in a position of almost a net lender, instead of a net borrower as in the past. In addition, most countries maintain flexible exchange rates and governments have made extra efforts to save. All these together have significantly reduced the region's external vulnerability.
The region's prospects have been modified to the downside in light of the deterioration of global conditions. Undoubtedly, in 2009 Latin America will report a more remarkable deceleration, but will not face a recession. The favorable macroeconomic situation will allow the region to mitigate the effects from abroad and also to stay in positive territory. Countries more exposed to international trade and external financing will be the ones more affected. But countries relying more on domestic markets and with more fiscal flexibility will be the ones reporting better performance. Hence, the region will be able to advance at a rate around 2.8 percent in 2009, after an estimate of 4.6 percent in 2008. Inflation will show a continuous declining trend as a result of both moderation of domestic demand and lower international prices. Currencies have already corrected and will stay at more competitive positions, which will prevent the acceleration of external imbalances.
Alfredo Coutino is Senior Economist for Latin America at Moody's Economy.com.