| | |  Business News | October 2008 
Financial Crisis Reaching Latin America
 Jane Bussey - Miami Herald
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 |  | With the United States now in a recession, Latin America is going to feel the punch.
- Manuel Lasaga |  | | | |
While Latin America initially seemed less vulnerable to the global financial crisis, recent stock market plunges and currency devaluations are showing that the region is far from invulnerable.
Credit problems, a turbulent stock market and slowing economies in the United States and Europe have sparked volatility in the region in recent weeks, threatening its steady economic performance, record-high foreign exchange reserves and low inflation rates.
"The international crisis is very strong," said Fernando Pozo, president of the Federation of Latin American Banks, FELABAN, and general manager of Ecuador's Banco del Pichincha. "There is no sense that this has hit bottom."
For South Florida, a trade and business hub for Latin America and the Caribbean, the regional downturn is certain to hit home.
As recently as early October, many officials and policy makers were confident that the region would emerge virtually unscathed from the troubles in the United States. But at the same time, some economists warned the region would face problems because investment funds poured into emerging markets would beat a retreat.
However, the swiftness of the drop in Latin American markets caught many by surprise and wiped away much of the optimism that the region would weather the global credit crunch without major problems.
The Mexican, Brazilian and Argentine stock exchanges have fallen by an average of 45 percent in October, steeper than the 26 percent dive in U.S. stocks.
Commodity and energy prices are plunging, with copper more than 50 percent lower than its high in the summer and the price of a barrel of oil down to below $64.
In the past, Latin American devaluations have been problematic for South Florida exporters who self-financed foreign sales instead of using safer but more costly letters of credit. Now with the recent devaluations - the Brazilian real has lost a third of its value in recent weeks and the Mexican peso has fallen from 10 to $1 in August to as low as 14 to $1 in October - Latin importers may find it more difficult to pay.
"I can't say I've seen massive cancellation of orders," said Al Merritt, chief executive of MD International, a leading medical equipment exporter in Miami. "People are taking more of a wait-and-see attitude, not buying as much inventory."
But he said Latin America needs U.S.-manufactured equipment. "Trade should still continue," he said.
Miami economist Manuel Lasaga said the region's economic growth will shrink to 2 percent to 3 percent next year.
"With the United States now in a recession, Latin America is going to feel the punch," Lasaga said, adding that a deep global recession would affect the region even more because of dropping commodity prices.
Latin America has experienced sharp devaluations and market plunges in the past. They've often been caused by a sudden loss of confidence in the region.
This time, however, at least so far, the region's banks are not engulfed in crisis. Few Latin American banks acquired the exotic debt instruments, known as collateralized debt obligations, which have proven so devastating to U.S. and European financial institutions, according to analysts and financial market participants.
But many banks hold bonds issued in currencies that have now dropped in value.
During the 1990s and up to 2003, many of the countries in the region suffered a series of severe banking crises. Pozo said the region's banks and government regulators learned their lessons from those experiences.
"The banks have to be as cautious as possible to confront the impact," said Pozo, who was in Miami on business this week. "Perhaps the moral is that it is important to have regulation."
Banks from the region, along with representatives from international financial institutions, will meet in Panama Nov. 16-18 for FELABAN's annual conference. Pozo said the meeting will give banks from Latin America the opportunity to meet with U.S. and European banks to discuss the availability of credit.
A number of Latin American corporations also face billions of dollars in losses after making currency derivative bets that the weak dollar would continue. Instead, the dollar has strengthened. Companies in Mexico and Brazil appear to be the most affected.
Mexico's Comercial Mexicana, the third largest supermarket chain, filed for bankruptcy after losing $1.4 billion on foreign exchange derivatives, according to a report in The Wall Street Journal. While the Mexican retailer took out the currency contracts with global financial institutions, Mexico's Grupo Financiero Banorte has reported it has a credit risk position with the chain.
jbussey(at)MiamiHerald.com |
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