How U.S. Financial Crisis Impacts Latin America

However, this is not the only impact that the Lehman Brothers bankruptcy, and the cascade of events that followed, has had on Venezuela's economy.

The events have directly affected Venezuela's finances, leading Sudeban, the Venezuelan agency that supervises banks, to demand that all institutions that owned assets issued by Lehman Brothers and Merrill Lynch (MER Quote) (which has been rescued by Bank of America (BAC Quote), also to avoid bankruptcy) secure 50% of the value of their assets. What's more, the National Development Fund [of Venezuela] has invested about US$300 million in products indexed to Lehman.

In fact, UNCTAD (the U.N. Conference on Trade and Development) has already warned of a setback in foreign investment in Latin America. Its latest report notes that "medium-term expectations have declined because of the global financial crisis, which will represent a setback for growth over the next two years." During the first six months of 2008, UNCTAD notes, the value of international transactions [in Latin America] was 29% lower than during the same period in 2007. UNCTAD estimates that foreign direct investment (FDI) [in the region] will drop by 10% for 2008 as a whole.

This falloff in FDI marks the end of several successful years in which Latin America became the preferred destination of many foreign investors. Brazil was the leader, attracting US$34.6 billion in foreign investment in 2007, the fifth-highest total in the world. Latin America enjoyed growing international confidence last year, when foreign investment in the region shot up 36% to $126 billion, according to UNCTAD.

Yet, much of this growth arose from sharply higher prices for oil and other commodities, and given forecasts for a slowdown in worldwide economic growth, those higher prices are now at risk. The future of Venezuela, for example, is narrowly tied to oil. Notes Obuchi recalls, "The country has experienced sustained growth recently as a result of higher oil prices, the country's principal export, which led to increased public spending and greater aggregate demand. If there were a sustained decline in petroleum prices, however, Venezuela could face risks of a different sort, depending on the volatility and the price of petroleum. Nevertheless, current conditions make it hard to estimate the impact that an economic slowdown in the U.S. would have on oil prices, which are a key variable for the Venezuelan economy."

Still, the Latin American countries that have recently acquired the status of "investment grade," including Brazil, have a certain cushion. "These countries are better situated to take in foreign investment, which is the best way to protect the continuation of growth," says Kon. However, despite improved economic policies for dealing with today's crisis, "a countervailing factor is the larger role that these countries are playing in the globalization process of the manufacturing and financial system, which means that the negative impact [of such a crisis] is considerably higher."