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Summary
Any doubts as to whether Latin America is part of the global
economy have been dispelled. The commodity boom cycle has
ended and in its place is the bust derived from the developed world’s
crisis. Economic indicators across the board are declining at a
shocking rate, while governments are scrambling to find policy
measures to help weather the storm. The issue, however, is not only
finding a way to mitigate the pain of a deep recession, but doing so
in such a way that the region can bounce back later without too
much harm to the long sought and hard fought macro-stabilization
obtained over the past decade.
It’s not easy to ease
Dealing with reality in Latin America
Starting in mid September, but especially after the shock felt throughout Latin America in October,
growth forecasts for 2009 have been slashed. Just a couple of months before, most central banks were still
expressing concern over rising inflationary pressures. Yet while the balance of risks changed rapidly,
monetary policy didn’t. Monetary authorities had been reluctant to act and received severe tonguelashings
from their respective federal governments. It is only now that central banks are finally starting to
ease.
Why was Latin America a late comer to the easing party? Few regions in the world have had a scarier
bout with high inflation in recent history. Central bankers were petrified that their long-fought
improvement in credibility would disappear overnight if they started cutting rates right after a serious
depreciation of their currencies. The experience from the previous three decades of sharp currency
depreciations revealed a significant pass-through to inflation, even in cases where economic activity went
into severe recession. What monetary authorities were trying to avoid was that precisely - increasing
inflation in the midst of a recession.
Now the easing has started and in most cases it is in an aggressive fashion. Yet the pass-through issue has
not been solved and may still come back to haunt central bankers. If inflation can be contained or even
reduced, central banks will have maintained credibility. But if this doesn’t happen, monetary authorities
will be seen as less independent, having buckled under political pressure to cut rates. The most vulnerable
of all, in our view, is Mexico, especially in light of mid-term elections taking place in July.
An overview of economic performance
Rapid deterioration in economic activity
Although world economic growth has been slowing down since the start of 2008, in Q4 it seemed to go
into a tailspin. The spill over into Latin America has been swift and wicked. While declining exports lead
the way, we are seeing significant declines in industrial production, retail sales, and employment across
the board. Only a handful of countries have yet to produce negative rates in these indicators (Uruguay,
Peru and Panama), but even these are registering an important deceleration. Some countries (Venezuela,
Ecuador, Bolivia, and Argentina, and to a lesser extent, Nicaragua and Honduras) are making matters
worse through unorthodox policy responses that are undermining property rights and preventing any
private investment that could still be observed. Even countries that were once considered almost immune
to downturns in the rest of the world (Brazil and Argentina) are not holding up to even a slight hint of
decoupling. As a result, after observing a weighted-average growth of 5.4% for Latin America in 2007
(above potential and a source of inflationary pressures), and slowing down to 4.0% in 2008, we are now
expecting a mere 0.3% growth in 2009.
Balance of payments concerns
Latin America as a whole produced a current account surplus between 2003 and 2007 and only a slight
deficit in 2008. The commodity boom produced both higher prices and volume, resulting in an important
influx of foreign exchange. In many countries, this was complemented by increasing wage remittances
and more foreign direct investment. As a result, with surpluses in both current and capital accounts,
foreign exchange reserves grew significantly. Now we are looking at a dramatic decline in world trade, an
important reduction in wage remittances, less foreign direct investment, an outflow of portfolio
investment, and little (if any) net external indebtedness. For most countries, this means a major
turnaround in the uses and sources of foreign exchange and thus changes in balance of payment positions.
The good news is that many countries in the region lost their fear of floating and adopted more flexible
exchange regimes that in theory will help absorb part of the shock. The bad news is that only a few are
true floaters (Mexico, Brazil, and Chile), while most of the others remain reluctant. Partial flexibility is
seen in Colombia, Peru, and Uruguay. Costa Rica seems to be learning quickly. However, Honduras,
Venezuela, Paraguay, Bolivia, Nicaragua, Guatemala, and Argentina have set either implicit or explicit
rules that result in regimes that seem closer to semi or full-fixed regimes. Panama, El Salvador, and
Ecuador are dollarized economies and thus subject to different rules.
This starting point is favorable to Latin America, that is, either current account surpluses or low deficits,
combined with relatively high foreign exchange reserves. As a result, we do not anticipate balance of
payments crises (with the exception of Venezuela and possibly Argentina). Nevertheless, if the global
recession lasts too long, major adjustments will need to be carried out.
Country briefs
Argentina
In our view, the Argentinean economy is already contracting, characterized by a consistent slowdown of
financing to the private sector. While we anticipate a GDP contraction of 1.2% in 2009, we see a
significant downside, especially if capital flight resumes.
Bolivia
Evo Morales was able to obtain enough support for the approval of its new, albeit radical, Constitution;
however, the opposition fared well in Santa Cruz and a few other provinces. This means that inner
conflicts are likely to continue and private investment will evaporate.
Brazil
Brazil is facing an unforeseen fall in output in spite of it being a more closed economy than the rest of the
region. The biggest concern is the country’s capital account, which has been subject to a sudden stop and
could cause balance of payments problems going forward.
Chile
Chile remains highly dependent on copper exports, which have been diminishing rapidly both as a result
of slower external demand and less favorable terms-of-trade. In our view, the government’s huge fiscal
surplus of 2008 will dissipate rapidly, but without causing major problems.
Colombia
Colombia registered relatively high fiscal and external deficits in 2008, making it especially vulnerable to
the global crisis. Lower than expected growth and lower oil revenues will likely cause the fiscal deficit to
grow significantly.
Costa Rica
Presidential elections will take place in February 2010, making 2009 a political year with many economic
issues on the table and difficult scenario for policy actions.
Ecuador
Ecuador stands to be the hardest hit economy in 2009 as a result of the decline in oil prices and the forced
correction of excessive public spending that must be addressed. The second external debt default in ten
years further complicates the scenario and seriously limits its balance of payments.
El Salvador
While dollarization has helped stabilize the economy, it is not helping the country to adjust to the
deepening global crisis, as its lack of monetary policy and a lender of last resort force most adjustments to
take place through a decline in economic activity.
Guatemala
Although monetary policy will ease this year, banks remain overcautious and credit will continue to
contract, not allowing the economy to recover sooner.
Honduras
The de facto fixed exchange rate has introduced rigidities in policy responses to the global crisis. As a
result, economic activity will take most of the adjustment. Upcoming presidential elections in November
complicate further policy actions.
Mexico
Mexico remains the most vulnerable to the global recession and the decline in international trade, and
unfortunately, domestic sources of growth will not suffice to mitigate a contraction in economic activity.
Mid-term elections will dominate the political agenda through the first half of the year.
Nicaragua
Nicaragua is one of the most vulnerable economies in Central America because of its political and
economic weakness. High dependency on wage remittances from the US will play a crucial factor.
Panama
Panama stands as the country best positioned to weather the storm, as the Panama Canal expansion is
fully financed and the global crisis started when the economy was at its peak. Presidential elections in
May 2009 will play a key role in shaping economic policy in the short-run.
Paraguay
While the end of the Colorado Party’s 61-year reign created large expectations for Fernando Lugo’s new
presidency, the global crisis has shadowed the country’s hope for continued economic growth.
Peru
We expect FDI to suffer significantly as lower commodity prices render many mining projects less
lucrative. The Peruvian economy did not diversify its export base in the boom years, and now should face
a significant deceleration in economic activity.
Uruguay
Surprisingly, we anticipate that Uruguay registered the highest growth rate in 2008. The economy is still
facing inflationary pressures and the central bank continues to tighten monetary policy.
Venezuela
We anticipate devaluation near 30% some time after the referendum to be held in mid February.
Nevertheless, this could prove insufficient unless matched by a substantial degree of fiscal restraint.
目录
Withering heights 7
It’s only now obvious… 7
Changes in forecasts 8
Industrial production in selected countries 9
What can we expect? 12
Looking for alternatives 17
Drivers during the boom may
determine the bust 18
Do good times explain bad times? 18
Fiscal policy management 23
Fiscal policy to the rescue 25
Fiscal policy response 25
Fixed Income 31
Between risk aversion and disinflation 31
Long disinflation, short credit 32
FX outlook 33
Calendar of economic
indicators, Feb.-March 2009 35
Country overviews 39
Argentina 40
Brazil 43
Chile 46
Colombia 49
Costa Rica 52
Ecuador 55
El Salvador 58
Guatemala 61
Honduras 64
Mexico 67
Nicaragua 70
Panama 73
Peru 76
Venezuela 79
Latin America at a glance 82
Disclosure appendix 90
Disclaimer 91
Contents
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