Defying the Downturn
Defying the Downturn
Following the release of first quarter indicators and news of record FDI rates, several Latin American countries showed capacity to weather global economic volatility. But analysts warn of slower growth in the coming year.
With first quarter indicators showing positive signs for much of Latin America, analysts continue to posit that the region appears prepared to decouple from the U.S. recessionary cycle. Still, concerns remain, demonstrated by mixed reports. The UN’s Economic Commission for Latin America and the Caribbean trumpeted the record $106 billions in foreign direct investment (FDI) funds attracted by Latin America in 2007—a 46 percent increase over the previous year. Yet the agency also lowered its forecasted 2008 growth for the region to 4.7 percent from 4.9 percent, pointing out that the U.S. slowdown is one of the main factors driving economic uncertainty in the region.
Several Latin American countries gained important markers of confidence. At the end of April, Standard & Poor’s (S&P) awarded Brazil investment grade status (BBB-). The rating opens the door for large pension and insurance funds to invest in the country. Brazil also attracted record levels of FDI in the first quarter of 2008, which hit $8.8 billion and marked a considerable increase of 33 percent compared to the same period in 2007.
Other rating agencies like Moody’s and Fitch may grant investment grade to Brazil as well, according to Latin Business Chronicle. But Brazilian economic expert Thomas Trebat, writing for the Latin American EconoMonitor blog, warns that besides the euphoria for Wall Street’s confidence vote on the Brazilian economy, investors still need to be cautious; an oversized public debt remains well over 40 percent of GDP and commands high interest rates for domestic debt. A Financial Times commentary opines that investment grade achievement “should not be regarded as an excuse for political complacency.”
Peru has also taken the stage as a Latin American economic maverick, gaining investment grade in April from Fitch with S&P expected to follow suit. Speaking at the COA’s annual 38th Washington Conference on the Americas, Peruvian Finance Minister Luis Carranza Ugarte highlighted the country’s impressive GDP growth. But social inequality and poverty levels remain high and threatens Peru’s economic growth. “Only through poverty reduction will we be able to consolidate our democratic system,” said Carranza. In a recent column, the Wall Street Journal’s Mary Anastasia O’Grady takes a closer look at uneven growth across Peru. Comparing globally competitive Lima to the Amazon’s Iquitos, she says that the difference in the two cities’ level of development exemplifies “what makes Peru ground zero in the continental struggle between modernity and atavistic socialism.”
Other countries in the region have shown positive signs of standing up to a global downturn, though warnings of slowing growth persist. Chile earned a reason to rejoice when its sovereign funds rated eighth in transparency and good practices among 34 countries. “[P]ractically all funds of emerging countries are below Chile’s rating as per transparency and accountability. We take that as good sign,” said the Chilean Finance Minister Andrés Velasco in late April. A Scotiabank Bank Group report (PDF) expresses confidence in Mexico’s ability to withstand the slowdown of the U.S. economy. It also forecasts a slower but solid economic performance in Colombia while highlighting worries about Venezuela’s inflation woes and shrinking confidence in Argentina’s economic policies. The International Monetary Fund estimates that Latin America’s economy will grow only 4.4 percent in 2008 and only 3.6 percent in 2009.
Speaking at COA’s annual Washington Conference, IMF Managing Director Dominique Strauss-Kahn emphasized that sound fiscal policy has underscored Latin America’s most sustained economic expansion since the 1970s.
