Bleak Outlook for Latin American Economies - Fitch

by: Research Recap

Fitch Ratings offers a bleak outlook for Latin American economies in a new Sovereign Ratings outlook for the region.

Latin America’s macroeconomic performance will be adversely affected by three simultaneous shocks: the global recession, lower commodity prices and a reduction in private capital inflows, Fitch says.

Fitch believes that sovereigns’ vulnerability and capacity to absorb these shocks will vary, largely depending on their policy discipline and flexibility. Moreover, the extent of financial and economic dislocation in Latin American countries will be a function of their level of trade openness, commodity dependence and financial integration with the rest of the world.

With the exception of Mexico, Central America and the Caribbean, most Latin American countries are heavy commodity exporters. As such, the strong decline in commodity prices in recent months and the expectation that most commodity prices will remain substantially below 2008 peaks this year imply that the outlook for GDP growth and the fiscal and external accounts has worsened considerably in the region. At the same time, the global de-leveraging process is likely to hit all countries to a certain degree as current account deficits deteriorate and private capital inflows dwindle, necessitating an economic adjustment. Finally, the impact of the global recession will be felt through trade, financial, overseas workers’ remittances and FDI channels.

Fitch projects Latin America’s real GDP to contract by 0.9% in 2009, with Brazil’s economy stagnating and Mexico contracting by over 2%.

While the scope of further monetary easing exists, credible counter-cyclical fiscal policies can be employed in only a few countries, making it challenging for Latin American authorities to lessen the blow of external shocks on their economies.

However, Latin America’s starting point is perhaps the best in recent decades, with five years of current account surpluses and rapid capital inflows leading to a substantial increase in the region’s external buffers. Many Latin American sovereigns have strengthened policy frameworks by adopting inflation-targeting regimes and implementing flexible exchange rates. Moreover, the absence of significant financial dollarization in most countries has given central banks substantial leeway to let their currencies depreciate in order to adjust in the face of external shocks.

In a separate special report Latin America’s Left: Beyond Commodity Prices Fitch discusses the economic prospects and challenges facing Argentina, Ecuador and Venezuela in greater detail. Fitch expects Argentina, Ecuador and Venezuela to contract in 2009 as well as suffer considerable deterioration in their fiscal and external balances due to their excessive commodity dependence and inadequate policy responses to the global financial crisis. Moreover, these countries’ inconsistent macroeconomic policy frameworks and the heavy influence of political calculations on policy decisions limit available options to soften the impact of the external shock.