How U.S. Financial Crisis Impacts Latin America

One key factor that could help limit any economic fallout from the credit crunch will be controlling inflation, Kon says. Yet, some Latin American countries look unprepared to take inflation on forcefully, said Dominique Strauss-Kahn, director general of the International Monetary Fund (IMF), in July.

Strauss-Kahn warned that inflation was spinning out of control in some emerging nations, and the IMF has forecast that Chile will finish this year with a 7.5% inflation rate; Argentina will reach 9.1%; Brazil will be at 5.6%; and Peru at 5.4%.

At the same time, there are some counterbalancing policies and conditions, notes Tuesta Cardenas. For example, Peru "has managed to consolidate its strong growth, which has an average rate of 6% during the last seven years, and which has been accompanied by prudent fiscal policy. This has enabled Peru to save a great deal of the extra income generated by the high prices of minerals such as gold, copper, silver and zinc. To achieve that, it has been tremendously helpful to use tax regulations that have been in effect since 1998. Equally fundamental have been the advances Peru made during the 1990s, opening the country to trade.

This progress has continued to deepen during this decade, enabling the country to balance, to a certain extent, its trade accounts. Peru enjoys trade surpluses in some manufacturing sectors, such as textiles and agribusiness. Along these lines, it's been critical for Peru to maintain an independent Central Reserve Bank."

Another lifesaver for Peru, said Tuesta Cardenas, is "the fact that a great deal of the current growth is anchored in internal demand, which provides it with breathing room over the short term."

In contrast, countries which depend more on external consumption -- such as Mexico and Venezuela -- will likely suffer more from the financial crisis originating in the U.S. Richard Obuchi, professor at the Institute of Advanced Management Studies (IESA) in Caracas, notes that the "country risk for Venezuela, as for other emerging economies, increased considerably after the Lehman Brothers bankruptcy.

In Venezuela, in particular, the perception of risk grew, moreover, because of events that affected diplomatic relations between the U.S. States and Venezuela that week (such as the decision by Hugo Chávez to expel the American ambassador.) Nevertheless, the main risk for the Venezuelan economy is the high level of that country's dependence on conditions in global oil markets. If the events in the United States lead to an economic recession, there is a risk that weaker prices for petroleum will spark a decline in demand for [Venezuelan exports of] energy, which would negatively affect the country's economic performance."