The Vulnerability and Resiliency of Latin American Countries

Jun.16.10 | About: iShares MSCI (EWZ)
In November 2009, I managed a research course at the University of Palermo (UP) in Buenos Aires on how Latin American countries were coping with the Western banking collapse and resulting global recession. A paper, co-authored with Diego Gauna, a professor in the Economics Department and Business School at UP, summarizes earlier findings and goes further to analyze what happened and why. The complete paper can be found on my web site.

The study covered Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Venezuela.

Key findings include:
  • The stock markets of Latam [Latin American] countries sold off as sharply as Western markets at the outset of the crisis. However, in most cases, they have recovered far more rapidly than is true for other regions.

  • The real estate markets in Latin America have shown very little weakness following the real estate collapse in Western nations. This could be due to the role of “safe investment” that families in Latam countries assign to real estate and the low percentage of families that have debt mortgages.

  • Despite urgings from Western banks and academics[1] to increase leverage and risk, the Latam banks have pursued more conservative courses and have shown little stress during the financial crisis. The banks did not hold or trade a significant amount asset backed securities (ABS).

  • The global recession impacted our countries primarily through three external sector paths – exports, remittances, and foreign direct investment, with the fall in exports being the single most important source.

  • Countries with exports dominated by one commodity (copper or oil) were initially hardest hit – however, the prices of both commodities recovered rapidly so the exports of these countries have recovered.

  • Countries where exports were less important or where exports were not concentrated in a few items showed less vulnerability and volatility, e.g., Brazil.

  • All our countries except for Ecuador and Venezuela used monetary and fiscal policies to counter the global recession. Ecuador could not afford a stimulus package while the impetus behind Venezuela’s policies is unclear.

  • Central banks with inflation-targeting policies are already considering interest rate increases in the belief that the recession is over. For example, Brazil raised interest rates last week.

  • Credit spreads have recently fallen for all our countries except Argentina and Venezuela. The high spreads in these two countries reflect international misgivings over government policies.

  • All of our countries with the exception of Venezuela will show positive GDP growth in 2010, but projected growth rates will be far below those registered before the global recession hit. This could in some way be a blessing inasmuch as growth rates for most of our countries in the 2006 – 2007 period were probably not sustainable.

I view Brazil as the strongest country in Latin America. With a growing middle class and a balance of manufacturing and natural resource exports, it should expand steadily over the next decade. Argentina also has great natural resources and shortly will settle its international debt obligations. Peru is a small country, but its growth rate in recent years rivals the high-growth Asian countries.


[1]Paul L. Freedman and Reid W. Click, “Banks That Don't Lend? Unlocking Credit to Spur Growth in Developing Countries”, Development Policy Review, 2006, vol. 24, issue 3, pages 279-302

Disclosure: Long EWZ, PRLAX