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JPMorgan's Joyce Chang on Latin American Markets

March 10, 2008

Latin America is more insulated from a United States slowdown than at any time in recent history.”

Managing Director and Global Head of JPMorgan Chase’s Emerging Markets Research Group Joyce Chang talked with AS/COA Online Managing Editor Carin Zissis about Latin American markets and how they will face a U.S. economic downturn. JPMorgan predicts 5 percent or more growth for emerging market countries in 2008, says Chang, who notes that “the commodities rally continues to support terms of trade in Latin America." Chang, who joins AS/COA as a speaker at AS/COA's 2008 Mexico City Latin American Cities Conference, says, “China is critical for emerging market economies given that it has been the key source of marginal demand for commodities in recent years.”

AS/COA: Debate has raged in recent months over how the U.S. recession will affect the global economy. How are Latin American emerging markets faring given the U.S. economic downturn?

Chang: As the outlook for G3 [United States, Europe, and Japan] growth has weakened, we have hardly moved our EM [emerging markets] GDP forecasts for 2008. With GDP growth driven by domestic demand in many EM economies and local banks not impaired by risky assets on their balance sheets, EM countries are driven much more by domestic factors. Indeed, among the few notable downward revisions, JPMorgan has taken down its Mexico GDP growth forecast to 2.6 percent over a year ago [oya]  from 4.1 percent for 2008 to account for the growth moderation expected in the United States, given the strong trade links. If a recession materializes in the United States, we project a still decent 5 percent or more growth for EM countries.

Notably, Latin America is more insulated from a United States slowdown than at any time in recent history, and even if a U.S. recession materializes, the region’s growth would still be above 3 percent oya instead of the baseline forecast of 4.3 percent for 2008. The commodities rally continues to support terms of trade in Latin America. JPMorgan’s Commodity Index is up 14.8 percent so far this year, and all three groups have rallied: agriculture +25.4 percent, metals +18.4 percent, and energy +9.6 percent. Despite the risks from G3 growth weakness, our commodity strategists warn that based on supply limitations in many commodity markets that prices can still go higher. They see further upside in precious metals and agriculture; a relatively stable range for base metals; and a decline in energy prices.

AS/COA: Given China’s hunger for commodities from Latin America is there’s any danger of the Chinese market softening and affecting Latin American economies?

Chang: In our view, what happens in China is critical for EM economies given that it has been the key source of marginal demand for commodities in recent years. We believe that China’s real GDP growth would decelerate only modestly to 9 to 9.5 percent in the event of a US recession, even if export growth slows to the low double-digit/high single-digit pace seen in 2001, as the Chinese authorities would most likely react to offset this through fiscal measures.

AS/COA: I wondering if you can talk about Latin American markets and how they have changed in recent years. What has the growth of Latin American stock exchanges such as Brazil’s Bovespa meant for the region?

Chang: I wouldn’t just limit it to the Bovespa. I think that you’ve got growth of Latin American markets more broadly, including the local currency markets where if you look since the beginning of the year, there are some $16 billions of outflows from emerging markets equities and the emerging markets fixed income has enjoyed about $4 billion of inflows. So I think that more countries in Latin America are now borrowing in the local currency market and they’ve really reduced the amount of borrowing that they’re doing externally in the international capital markets. The growth of the equity markets has meant that there’s more foreign direct investment [FDI] that’s coming in overall. In the month of January, for example, in Brazil there was about $5 billion that went into Brazil and Brazil has not traditionally attracted that much FDI.

AS/COA: You’re going to be joining us at a Latin American Cities Conference in Mexico. Can you talk about Mexico compared to other Latin American emerging markets and what exactly differentiates Mexico?

Chang: I think this time around Mexico is showing resilience to the U.S. economic downturn. The economic deceleration has proven more moderate than anticipated and it’s been supported by a rally in the local markets. Energy reform has been moving forward and we anticipate congressional approval between May and June. I think Mexico actually has outperformed and it’s probably one of the only countries in the region where we still see some reform momentum. What’s happening with many of the commodity exporters is that they’ve really slowed down the momentum on structural reforms.

So I think in Mexico the economy is set to decelerate but, unlike in previous downturns, this time it is more resilient. We see that growth could come down to 1 to 1.5 percent in Mexico. But we still think that the approval of the fiscal reforms together with high oil prices will enable the Mexican government to run a countercyclical fiscal policy this year. The manufacturing sector has also turned more competitive in part due to the weaker peso in real terms together with the dollar versus Mexico’s main competitors in the U.S. market. In addition, the progress on reform should be supported for enhancing productivity growth and long term competitiveness. The key risk is if the U.S. falls into a very protracted recession, and we still have more of an upturn in the U.S. program for the second half of the year.

AS/COA: During the U.S. presidential campaign there has been a somewhat protectionist tone in terms of trade agreements such as NAFTA. What could this mean for Latin American emerging markets?

Chang: I think there’s a lot of rhetoric but I don’t actually think that you’re going to see a shift in policy. I think all three candidates right now in the U.S. are actually quite moderate on their economic policy even if they’ve used populist rhetoric. I would not see a reversal to free trade agreements. The rhetoric has been a lot different than the actions, and that’s been the case for the last couple years from various political candidates.