Summary
This year is marked by higher than baseline levels of uncertainty, brought on by the downstream effects of the sub-prime meltdown, continuing weakness in the dollar, and the first whispers that the United States – by far the world’s largest economy, with 34% of world GDP – is in fact already in recession. Latin America continues to be relatively shielded from the global credit crunch, aided by more resilient macroeconomic policies, strong fundamentals heading into the event itself, and limited exposure to the affected institutions.
Analysis
It’s the most wonderful time of the year…
It’s that time of year again, when pundits and crystal ball-gazers all around the world review their numbers to see if capital markets have cooperated with their predictive capacity. This year is marked by higher than baseline levels of uncertainty, brought on by the downstream effects of the sub-prime meltdown, continuing weakness in the dollar, and the first whispers that the United States – by far the world’s largest economy, with 34% of world GDP – is in fact already in recession.
Latin America continues to be relatively shielded from the global credit crunch, aided by more resilient macroeconomic policies, strong fundamentals heading into the event itself, and limited exposure to the affected institutions (the credit-crunched firms constituted a negligible portion of Latin American portfolios).
2008 will be slower, but not alarmingly so
The potential risk to the forecast is in 2008, when drag from slower US growth will have a drag effect on the whole of the Americas. We anticipate that Latin America’s GDP will decline to 4.4% for 2008, whereas the region is still on track to close 2007 at a respectable 5.2%. The trend reflects a revision in global growth forecasts, from 5% for year-end 2007 to 4.8% at year-end 2008.
Growth in the advanced economies – the US, the Euro Area, and Japan – is forecast to slow somewhat in 2008, dragged down by weaker export demand, tighter credit and a marginal decline in consumer spending, but there is no expectation of contraction. Global growth for 2007-2008 is powered by China and India, who together account for a remarkable 45% of all global growth when adjusted for purchasing price parity.
Risks to the regional forecast
Risks to the Latin American outlook are exogenous, that is, the potential for volatility comes from the region’s vulnerability to global, mostly US, dislocation, rather than from any danger from sovereign policies. This is the downside of Latin America’s hard-won integration: having carved itself a role in the global economy, the region must also be able to withstand the risks that come with it.
The two principal sources of risk in the near term are a decline in asset prices, specifically housing, and a sudden dollar decline. The first situation, should it arise, would be fairly localized to Mexico, which has benefited the most from the US housing bubble in terms of remittance income (from Mexican wage earners in the US construction business), which in turn fueled consumer spending on household expenditures, as well as a mini-boom in residential construction, unsecured consumer credit expansion, and exports of residential construction materials. A revaluation of asset prices would be fairly moderate and short-term (1-2 quarters from onset to recovery) should it arise at all, allowing Mexico to regain a growth trajectory by the end of 2008.
The prospect of a sudden drop in the dollar (as opposed to a gradual, controlled decline) has wider implications which would likely call for a multilateral intervention to contain the risk of contagion.
What to watch for in the Latin economies?
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Strong performances in commodity exporting countries, like Peru and Venezuela, who continue to command record prices for mineral and oil exports; a dip in Mexico in 1H08 followed by a gradual recovery by 4Q08.
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The virulent expansion of consumer credit, which is becoming an increasingly important driver of growth throughout the entire region.
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Renewed jitters on the part of the region’s central banks, concerned about the direction of the US dollar, as well as unresolved conflicts in the regulatory environment surrounding bank financing through the equity markets.
