Thursday, 8 January 2009

S&P Expects Sharp Economic Slowdown in Latin America. A Bit Late to Say That, Right?

I just came back from a long bike ride, and found out this on my mailbox. Standard and Poor's analysts finally decided to say it -- that the region will not be spared from the current global environment and growth is set to decline regionwide. That despite Latin America ''being in its best position ever to face a global economic slowdown.´´

S&P projects that in 2009, weighted average real growth in Latin America will be less than half of what it was in 2008, dropping to 2.1 percent from 4.8 percent. Lula, hey, listen to this: ''We do not expect fiscal and monetary policy to meaningfully offset the heavy drag on growth from the deteriorating global backdrop,´´ noted S&P's Lisa Schineller. It's funny that despite the general creed among most economists and analysts that decided that Latin America was the next superb growth story (this was in 2004,) the same analysts are now beginning to say that governments in the region likely won't be able to carry out counter-cyclical fiscal and monetary policies to combat economic downturns. Latin America's long history of high debt and economic instability is weighing on their recommendations.

One thing I used to say when I was working for Bloomberg was that it was a mystery whether the local credit and capital markets would be able to take up the slack left by international borrowers, lend more and provide the support for growth. At the moment (Sept. 2007) I was optimistic it would happen (via gains in scale, acquisitions, their local expertise and the fact that they were winning the war for new depositors in their own countries.) But, unfortunately, it is clear that the domestic financial systems were incapable of lending to companies and individuals in greater scale without suffering capital and scale strains. S&P recognises this fact and incorporates it into its analysis. That is why, in the current scenario of tight global liquidity and cautious allocation of resources, those governments that have the best image before international investors are rushing to obtain new financing (remember the debt sale binge of the past two days?) Well, nothing has changed from 2002 -- I mean, dramatically: governments remain in a much better position than companies to borrow and refinance foreign debt.

One thing that I really believe will play an important role in the coming months -- and that S&P mentions in its report, is the political cycle of 2010. The crisis will make policy making more challenging and especially tricky. Incumbent presidents will do anything at their hands to avert a pronounced deceleration before they hand power to their successors. On the other hand, the political opposition will try to seize many opportunities -- and derail government initiatives -- ahead of elections in 2010. Countries where the political cycle (presidential and/or congressional elections) will take place are Colombia, Brazil, Venezuela ... Check that carefully, dear reader.

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