Financial & Economic Crisis hits Latin America

It was the turn of Latin America's stock market to take a nose dive this Wednesday - "Dark day for faltering LatAm stocks" . In Chile they dropped 6.3%, in Mexico by 7 %, in Brazil by 10%, and last but by no means least Argentina, where they dropped by 18%.

The magnitude of the drop in Argentina was provoked when President Cristina Fernandez announced plans to nationalise the private pension funds.

She said the nationalisation would protect retirement funds from the global financial crisis, but analysts said the move would drain company access to private capital. Argentina's Congress is expected to approve the proposal within weeks. BBC News: "Turmoil in Latin American Markets".

Privare investors have been upin arms, not least a Merrill Lynch executive who stated bluntly that his bank had now written off any investment plans in Argentina "for at least the next half decade." - AFP, "Latin America in Jaws of Global Crisis"

As I mentioned in an earlier post - "Global Depression: So What About Latin America" - much of the worry in Latin America on the back of the current world financial crisis, stems not so much from the so-called credit crunch, but rather the sharp recession that's meant to hit the world's major markets in the Northern hemisphere, and the decline in commodity prices that it will entail.

Correspondents say international demand is declining for many of Latin America's commodity exports, including oil, copper, iron ore and soy as global growth slows amid the current financial global crisis BBC News, "Turmoil in Latin American Markets".

Whilst demand may be faltering in the US and Europe, demand from the likes of China is still bouyant.

This is not to say that all is as gloomy as one could fear. Precious global recessions have tended to hit Latin America harder than most. The analogy of "when the US economy sneezes, the rest of the world cathces a cold, but Latin America catches phnuemonia" having proven to be quite fitting in th past. This time round things may be slightly different. According to former Mexican foreign minister, Jorge Castañeda:

the region would be largely impervious to the recent crisis. Mexico, Chile, Brazil and Uruguay should manage just fine, emerging with only bruises and scrapes, he argued. Colombia and Peru would weather the storm, though suffering greater harm. But he warned of "severe damage" for Venezuela, Bolivia, Ecuador, Central America and the Caribbean. BBC News, "Brazil squares up to an economic storm"

The severe damage awaiting Venezuela has much to do with the sudden drop in oil prices. Overdependent on oil revenues, Venezuela's extensive public spending could be seriouly affected if oil prices continue on this downward trend. It is therefore no surprise that Venezuela qill be pushing for oil output cuts at this week's hastily convened OPEC gathering in Vienna.

Venezuelan Oil Minister Rafael D. Ramirez said the OPEC members "have to take some action now, now," adding that Friday's meeting will reach "consensus to take a very, very, very fast action." Xinhua, "OPEC members divided over oilput cut"

Last week I attended a public meeting at the Houses of Parliament here in London, where Venezuelan ambassador to the UK, Samuel Moncada, whilst almost gleeful in his depiction of the collapse of the world's financial system, had to admit that Venezuela faced difficult times ahead. So what about all the windfall funds from record-high oil prices that the Venezuelan had been meant to have store away for precisely those times when the oil prices were on the fall? Well, according to the ambassador this would only cover Venezuela's problems for a mere 2-3 months.

Global Depression: So What about Latin America?

In the midst of the financial turmoil that has swept ominously across North America and Europe, news how this may affect Latin American economies – traditionally so dependent upon the state of the U.S economy – has been somewhat hard to come by in the British press.

Nevertheless, last week’s The Economist did have an article highlighting the numerous pessimistic scenarios that may be played out in Latin America as a result of the financial turmoil in the world’s credit markets – “Keeping their fingers crossed”. True to its right-of-centre, pro-market editorial line it predicted that the “badly behaved” economies (i.e. overly statist and anti-neoliberal), such as those in Venezuela and Argentina, are the one that are most vulnerable.

Their vulnerability stems not so much from the lack of credit available to them, but their overreliance on commodities: Venezuela on oil, Argentina on agricultural produce. The belief being that a downturn in the world economy would naturally lead to a slump in commodity prices.

Other Latin American countries look set to be hit by a decline in commodity prices as they have fallen to the age-old temptation of overspending when times have been good and consequently saving little for when times worsen. Bucking the trend, as is so often the case when it comes to perceived sound economic management, is Chile where its copper stabilization fund should insolate the economy from a slump in copper prices.

Fortunately for the likes of Brazil, Colombia and Peru – “the well-behaved countries” in The Economist’s tinted eyes – their trade surpluses and balanced budgets, records of year-on-year growth, and lack of dependency on the increasingly limited sources of foreign credit should offer their respective economies the means to avoid the recession that has so often followed in the wake of U.S. downturns.

But all isn’t rosy in the case of Mexico, and indeed with most Central American and Caribbean nations. By remaining so dependent on US markets and remittances from relatives working in the US, the severity of the economic crisis facing the US will have the inevitable effect of casting a long murky shadow over their economies. Perhaps this will nail home the argument that despite the lure of the US market Latin American nations can only benefit from diversifying trading partners, increasing regional trade and so on.

In the aftermath of all this financial mess it seems likely – especially if the Democrats retake the White House – that all proposed free trade agreements with Latin America are to be put firmly on hold; furthering the need for Latin America to look towards China and the rest of Asia.

Despite the relative upbeat tones, The Economist makes sure to hammer home that it will be the Bolivarian following of Chavéz et al and their economic populist policies that have most to fear from the global credit crunch.

Castles in the Sand: A prediction of more economic turmoil in Argentina

Here is a news article from the The Development Executive Group that popped into my inbox this morning. Unfortunately it predicts more economic turmoil for turmoil-ridden country. Headlines shouting out “Farming Crisis” have been staring me in the face from the Financial Times and The Economist alike, the last few weeks. Yet it’s with trepidation that I even begin to embark on understanding the complexities and , for some, the irrationality that seemingly forever embeds Argentine macroeconomic policies. But it has to be done…

But anyway here's a nice easy analogy for Argentine economics to get us going.

"Argentina is like a kid who makes a really good sand castle at the beach, takes
a lot of care in building it just right, then steps on it himself. Things have
been good recently. Now we have to put a question mark on everything."

-- Taxi driver Jose Luis Baldini, 60, voicing a bleak notion that has become conventional wisdom for many in Argentina here: Good times never seem to last. Today's Argentina is not gripped by crisis but rather by the fear of crisis, the Washington Post reports. Several strikes by farmers, furious over government policies, have sparked concerns about lasting damage to the economy. Many Argentines have been exchanging their pesos for dollars, forcing the government to dip into its surplus to keep the currency stable. Consumers, told that their government faces a shortage of natural gas, are bracing for blackouts. As recently as February, the government had been buying up vast quantities of dollars to keep the peso's value artificially low -- a strategy designed to boost exports and domestic investment. But after the farm conflict began, Argentines traded millions of pesos for dollars and forced the government to flip its strategy: It's now dipping into its USD 50 billion reserve fund to prop up the value of the peso, the Post reports. "The government right now is fighting the people who bring the dollars into this country, namely the farmers," said Alejandro Marino, 49, a lawyer in Buenos Aires. "Despite what the government is saying, there are clear signs that there will be a shortage of dollars here one day."

Global Development Briefing - Castles in the Sand