Impact of the Global Financial Crisis

Speakers:

• Alberto J. Bernal-León, Head of EM Macroeconomic Research, Bulltick LLC
• Randy A. Bullard, Shareholder, Greenberg Traurig, P.A. (moderator)
• Hon. Ana M. Guevara, U.S. Alternate Executive Director, World Bank (opening speaker)—view presentation
• John Price, Managing Director, Business Intelligence, Kroll-InfoAmericas—view presentation
• Douglas Smith, Chief Economist, The Americas, Standard Chartered Bank

Summary

On December 5, 2008, the Americas Society and the Council of the Americas held their 5th Annual Latin America Predictors Forum in Miami, focusing on economic, financial and business prospects for the upcoming year. Discussion centered on how the global economic crisis has affected Latin America, opportunities for growth and prospects for the region’s businesses, as well as trade and the external environment.

Growth Figures Revised Down

While some thought Latin America would be immune to the global financial crisis, the numbers show that this is clearly not the case. In opening remarks, U.S. Alternate Executive Director at the World Bank Ana M. Guevara named three major factors affecting Latin American economies: financial contagion and lower remittances, a drop in commodity prices, and a decline in external demand relating to the slowdown. She also shared the Bank’s revised numbers for growth in the region in 2009, down to 4.5 percent from an earlier estimate of 6.4 percent.

These figures correlate with investment prospects for the region. Doug Smith, chief economist for the Americas at Standard Chartered Bank, pointed to a downward spiral: lower growth means lower trade, which brings down commodity prices and leads to shrinking government surplus, resulting in higher risk aversion and, ultimately, lower foreign direct investment (FDI). Not surprisingly, the region’s investment-grade countries (Colombia, Brazil, Mexico, and Peru) are in the best fiscal shape to spend their way out of the crisis, says Smith. Ecuador, on the other hand, runs a deficit of around 6 percent because of the lowering price of oil.

John Price, managing director of Business Intelligence at Kroll-InfoAmericas, underscored the fact that lower commodity prices will mean major declines in tax revenues for countries like Mexico, Ecuador, Venezuela, and Trinidad. As a result, many state infrastructure projects in these countries have been delayed while others have come to a screeching halt.

Credit and the Business Outlook

Much as decreased growth translates to lower FDI, lower access to credit translates to decreased consumption and lower reinvestment of corporate profits into development. Price noted that, for once, Latin American governments have been fairly responsible in their use of credit while corporations have taken on important debt. Even though profits in Latin America have held steady in recent months, multinationals are hurting globally and, therefore, have less freedom to reinvest in development. On a brighter note, this means more areas of potential acquisition in Latin America, leaving the private equity community “licking their chops,” according to Price. (He added that this will also be a good time for lawyers.)

Shrinking access to credit also poses a problem for consumers. Price cited expansion of credit as the single most important factor in developing the retail market in Latin America as people began to consume up to 26 percent more than their incomes. A business model built around this fact will become obsolete if confidence cannot be restored and banks do not begin lending again. The lack of credit will also affect import distributors, who may find their working capital decimated overnight, making the shift toward the informal economy increasingly tempting.

Global Trade and Restoring Confidence

There was a general consensus that the question of trade remains crucial. Bulltick’s Head of Emerging Markets Macroeconomic Research Alberto Bernal cited Chile’s open approach as a model, warning that if other countries instead turn to protectionism this will only stifle innovation and growth instead of restoring confidence and stimulating the economy.

South American countries are increasingly open to trade with China, where a growing middle class presents an important market for exports. Smith was reassured by recent trade agreements in the region, even if rising trade with the EU and China will mean less of a share for the United States. For now, growth in emerging markets offsets problems facing the G7, which Smith hopes will help speed a turnaround in risk aversion. Once banks reopen credit lines, global trade will be facilitated and growth will follow.

Restoring confidence will also be pivotal in the turnaround of the global economy, and the Latin American situation cannot be considered without looking also to China and the United States. Bernal showed some optimism for the government response to the crisis, pointing to the importance of a quick reaction for restoring confidence to the markets. He praised U.S. Federal Reserve Chairman Ben Bernanke’s efforts to expand the monetary base in the United States and create a bubble to generate growth—policies that, in normal times, would be considered irresponsible, but can be see as wise in today’s environment, said Bernal. While Price did not predict a rise in consumption before the end of 2010, Bernal and Smith agreed that the U.S. should not face a major depression and Smith said to expect growth by late 2009.