How U.S. Financial Crisis Impacts Latin America

No region is immune from the international financial crisis sparked by the subprime mortgage debacle in the United States. This includes Latin America, which had recently enjoyed good times thanks to growing foreign investment and rising commodity prices.

But with the worldwide credit crunch now poised to transmit its effects to the real economy, Latin America will likely see a significant decline in export revenues and foreign direct investment originating from the U.S. over the next couple of years.

The crunch also is likely to increase the costs of debt financing for the region. And it all comes against a background in which economic growth in Latin America was already beginning to slow. Experts analyze the impact the credit crunch will have on various Latin American countries for Universia Knowledge@Wharton.

Notes Anita Kon, professor at the Catholic Pontifical University in Sao Paulo, "Emerging economies will be very much affected by the U.S. crisis, just like the rest of the world, because the financial system is quite globalized and the crisis tends to spread through the system."

Still, Kon stresses, some Latin American countries are better prepared to weather the storm, notably Chile and Brazil, which have taken stronger steps to shore up their economies in recent years. They will now have to review their plans for spending and public-sector investment, and their policies for supporting production, combating inflation, and various social-spending policies.

In contrast, countries such as Venezuela, Bolivia and Colombia, which are undergoing internal political conflicts, have less stable economies and will likely be more affected by financial developments in the U.S, Kon notes. "There is the [unique] case of Mexico, which has always been different from other Latin American countries because it is directly affected by demand patterns in the U.S. This time, as a result, it will suffer a significant impact."

Inflation, Exports and Structural Measures

Latin America and the Caribbean region have come off of two of the best back-to-back years of economic growth in decades -- up over 5.5% annually in 2006 and 2007. But even before the credit crunch the heady growth looked set to cool off. World Bank forecasts from June for the region already called for GDP growth to slow to 4.5% in 2008 and 4.3% in 2009. It will surprise no one if those numbers get revised down.

The prospects for Latin American economies have always been tied closely to those of the U.S. If the U.S. sneezed, Latin America got a cold, the saying goes. Still, some argue that this time things will be different. David Tuesta Cardenas, a professor at the Catholic Pontifical University in Peru, says that, "Unlike previous crisis scenarios, Latin America will wind up with only a mild cold, not pneumonia. However, it will depend on the support programs that were developed by each of the countries over the past five years. It will be important to see how much fiscal savings have been generated during this period; how well public-sector debt has been managed; and to what extent exports have been diversified. Countries such as Chile, Peru, Mexico and Colombia seem to have managed things better in that regard. However, Venezuela and Argentina may have done less [to address those issues]."