How U.S. Financial Crisis Impacts Latin America

Brazil, Kon notes, "is in a favorable situation when it comes to macroeconomic indicators. On the other hand, price increases for some food products are slowing down, which affects inflation. So Brazil may react better to the impact of the crisis. Still, the decline in external credits and direct foreign investment will affect the growth of private-sector companies as well as the expenditures and investments that the government has outlined in its ambitious plans for [building new] infrastructure. That's because tax collections are already at an extremely high level and do not show any signs of increasing."

Possible Solutions

Although each country has unique circumstances, expect all Latin American exports to be seriously damaged by the financial crisis. Countries most exposed [to the U.S. crisis] will be hurt the most of course, notes Tuesta Cardenas. He forecasts "a slowdown in those export sectors that are most closely tied to the U.S. market, such as textiles." Along the same lines, Kon notes that "sectors that are focused on exports, such as steel and other mineral inputs, will also reflect the decline in global demand."

Obuchi sees a generally uncertain future for countries counting the U.S as their main trading partner. "A decline in the growth rate of the U.S. would have direct consequences on demand for products that Latin American countries export." At the same time, "the U.S. financial system is rebalancing its portfolio of assets into positions that are less risky. This has a negative impact on the valuation of the debt of emerging countries. As a result, it could raise the cost of indebtedness for these countries."

What is the best way to limit the damage? "Recipes don't always wind up having positive results. It depends on the chef, the availability of high quality ingredients, and on the reaction of the person who eats the product," notes Kon. Nevertheless, she adds, the basic ingredients in any diet for addressing this crisis are "the containment of public spending; higher interest rates for restraining inflation; precautions about higher-risk investments in manufacturing and financing; and [assuming] greater control over each country's internal financial system."

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