Global Market Volatility and Latin America
Global Market Volatility and Latin America
Unlike previous economic shocks, more stable regional economies may help insulate Latin America from global market volatility. At a recent AS/COA roundtable, experts emphasized the importance of continued surpluses and improved international reserves to short-term debt ratios.
Speakers for the panel “Global Market Volatility and Latin America” included:
- Guillermo Perry, Chief Economist, Latin American Region, World Bank
- Geoffrey Dennis, Managing Director, Latin American Equity Research, Citigroup
- Douglas Smith, Chief Economist, The Americas, Standard Chartered Bank
AS/COA Senior Director of Public Policy Programs Michele Levy moderated the New York roundtable discussion, and a question and answer session followed the speakers’ presentations. This summary provides an overview of the main points from the panel.
The fallout from the housing market’s downturn in the United States has reached beyond the U.S. subprime mortgage sector to spark concerns over global market volatility. The extent of the damage remains unclear, yet many experts say Latin American countries have diversified their economies so as to be better insulated from global economic shocks. Latin American nations are experiencing their biggest growth rates in years and have strengthened their economic fundamentals: Debt levels are low, international reserves are high, and many countries currently run trade surpluses. However, no country can be guaranteed immunity from a global cyclical downturn. How will Latin America fare this time? The AS/COA convened three financial experts to discuss the effects of global market volatility on the region’s economic outlook.
All three speakers struck a note of optimism, citing the strong recent performance of Latin American markets. Although Latin America proved vulnerable to market volatility in the past, the speakers noted that the region’s economies now appear better positioned to withstand challenges posed by external downturns. The U.S. subprime crisis has had limited direct impact, speakers agreed, as central banks in Latin America have no subprime exposure and—in a further sign of vitality—none of the banks have raised interest rates. As events unfolded in recent weeks, the spread of high yield bonds in the United States increased, yet Latin American and emerging market spreads remained lower, marking a dramatic change from reactions during previous international market shake-ups.
Current Situation
An intersection of good policy and good luck in the form of high commodity prices and high liquidity has helped Latin America to stabilize and improve its economic standing, says Douglas Smith. Many Latin American countries are running surpluses and have improved ratios of international reserves to short-term debt. Because of high liquidity ratios, most countries in the region could sustain themselves for at least two years in the event of further global financial turbulence. In trade terms, the region has opened up in the past five years, with Chile leading the way in terms of signing free trade agreements. Currently, Latin America benefits from commodity prices hitting some of the highest levels in decades, a stark contrast with the price drop during the Russian crisis of 1998. Furthermore, Dennis predicted a long-term trend in declining cost of capital.
Taken as a region, Latin America presents a strong profile but Guillermo Perry drew attention to differing performances among individual countries. While Argentina was less affected by the Russian crisis, now it is Brazil that seems least touched by the recent U.S. downturn. This is a result of Brasilia’s fiscal adjustments and reduced vulnerabilities. During the Russian crisis, Mexico and Peru reacted similarly to each other; now Mexico has improved its fiscal performance and appears more stable. Although most Latin American countries have lower levels of debt and proven debt management records, some, such as Argentina and Colombia, continue to maintain high levels of public debt, noted Perry. While the region’s spreads of high yield bonds did not shoot up dramatically, countries seen as more risky have shown a higher spread as risk-aversion grows. Yet Perry emphasized that a major reassessment of risk is not underway.
Further analyzing differences within the region, Perry highlighted Argentina’s impressive recovery and fiscal situation, but expressed concern over its lack of clear industry regulation, high level of imports, and potentially limited liquidity. All panelists singled out Brazil as demonstrating impressive growth and potential, although Dennis remained cautious about the country’s ability to lower interest rates. Overall, speakers were extremely positive but emphasized that Latin American countries must remain vigilant and flexible to avoid potential fallout from global financial volatility.
Current global economic projections remain positive, but the extent of the damage may not be felt for months, said panelists. If the U.S. market does not correct itself and stabilize, global markets could face a more drastic downward trend, which could spell problems for Latin America. However, with increased and more diversified Latin American export portfolios, external accounts could be adjusted with relatively small exchange rate changes, said Perry. He argued that as long as Asia is not overly affected by global volatility, Latin America will maintain its positive projections. Smith emphasized the need to further strengthen economies through additional free-trade agreements, boosting domestic demand, and lowering debt.
Geographic diversification in trade was a theme touched on by all speakers. The region has increased trade through expanded ties to Asia, commented Smith. The debate over closed versus open economies continues. The relatively closed nature of Brazil’s economy may have helped to protect it from external market fluctuations. In the case of Mexico, strong economic ties to the United States render it vulnerable to U.S. market fluctuations. Panelists expressed concern, but noted Mexico demonstrated confidence by halting a planned tightening of interest rates.
Speakers agreed that volatility will be a constant until the U.S. economy fully recovers. However, Dennis emphasized that although the path of the global economy may prove erratic in the near-term, the eventual recovery could result in new highs for Latin America. As a result, Citigroup plans to maintain aggressive targets for the region in 2008. Boosting confidence in the region to implement counter-cyclical fiscal policy during times of international volatility should be a priority, commented Smith.
