Why Latin America is better prepared to ride out slump

McClatchy NewspapersJanuary 12, 2009 

CARACAS, Venezuela — The deteriorating global economy will end five boom years in Latin America in 2009, analysts now believe.

Latin American companies are shedding workers and having trouble getting loans to finance exports. Governments are likely to run budget deficits after producing surpluses, immigrants to the U.S. and Europe are expected to send less money home and millions of people will be forced back into poverty, even as the strongest countries spend billions to lessen the pain.

"It will be a difficult year," Alfredo Coutino, a senior economist for Latin America at Moody's Economy.com, said Monday.

The good news is that most Latin American countries saved money, found new export markets and kept inflation low during the good years. This has left them better prepared for the downturn.

Peru, Chile, Panama and Brazil seem best positioned to ride out the economic storm, analysts said.

Countries led by free-spending populist leaders could face a particularly difficult 2009.

Ecuador has defaulted on a portion of its foreign debt and seems to be turning inward.

Venezuela failed to diversify its oil-dependent economy and is facing a sharp slowdown from the global oil bust while experiencing Latin America's highest inflation rate, 30 percent.

Argentina is suffering from plummeting soybean prices, double-digit inflation and a scarcity of foreign investment.

Mexico and the Central American countries are facing an especially bleak 2009 because their economies are tied so directly to the U.S., whose economy is expected to contract in 2009.

Latin America is expected to grow by only 1.9 percent in 2009, according to the Economic Commission for Latin America and the Caribbean, a United Nations agency that's based in Santiago, Chile.

Latin America grew by 4.6 percent in 2008 and 5.8 percent in 2007, the agency reports.

"One by one, the motors of growth are disappearing," Alicia Barcena, the agency's executive secretary, said in a December presentation in Santiago, where she ticked off a decline in those economic drivers: export growth, remittances, commodity prices and foreign investment.

In Brazil, the world's 10th biggest economy, sales of new cars, apartments and home appliances plummeted in October and haven't recovered.

Brazilian mining and metals firm Companhia Vale do Rio Doce, facing a sharp drop in demand for steel worldwide, already has laid off 1,000 workers in Brazil and announced a worldwide reduction of 30 million tons of iron ore production.

Brazil's General Motors subsidiary has kept idled one of its three Sao Paulo manufacturing plants and is expecting to produce and sell 10 percent fewer cars in 2009 than it did in 2008, said company spokesman Renato Luti.

Brazil's economy, which grew at a robust 5.9 percent in 2008, is expected to expand by only 2.1 percent in 2009.

Brazilian President Luiz Inacio Lula da Silva announced another stimulus plan on Monday, saying the state National Development Bank would step in with loans for the private sector. Lula's government had already spent $164 billion to assist banks and private companies.

Peru, which in 2008 had its fastest economic growth in 14 years, is spending $3.2 billion to pump up its economy. Forecasters expect Peru to have the best economic growth rate in 2009 of any Latin American country, followed by Panama, Uruguay and Cuba.

Chile, which is the long-time favorite of foreign investors, announced a $2 billion economic investment plan last week. The country's central bank also made the biggest cut in interest rates in 10 years.

Past economic crises have been devastating to Latin America. Jerry Haar, a professor at Florida International University's College of Business Administration, however, said that governments and companies throughout the region are better managed and have strengthened their balance sheets.

"They have diversified their export base," he said. "They no longer have all of their eggs in one basket."

Some numbers bear this out.

Latin America and the Caribbean held $170 billion in foreign reserves in 2000. Foreign reserves rose to $500 billion last year.

Foreign debt sank Latin American economies in the 1980s. As of 2000, foreign debt was 49.9 percent of GDP. In 2008, it had declined to 36.8 percent.

"Latin American countries are in better shape than they have been in decades to manage the extremely challenging global environment," Lisa Schineller, a credit analyst for Standard & Poor's in New York, wrote in a report three weeks ago.

Eduardo Lora, an economist at the Inter-American Development Bank, said that Brazil and Colombia sold foreign bonds to investors last week — an indication that the credit crisis might be thawing. Only one emerging market country, Mexico, had been able to sell bonds since the global economic crisis hit in September.

An increase in poverty in Latin America in 2009 would reverse a trend. While 44 percent of Latin Americans lived in poverty in 2002, only 33.2 percent did in 2008, the U.N. economic commission reported.

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