| | |  Business News | October 2008 
The Financial Crisis In Latin America - Part 2
 Stratfor
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Commodities
As a region, Latin America is largely dependent on the export of primary materials for income. Latin American economies have ridden high over the past decade as rising industrial production (mostly in other countries, and particularly in China) ramped up demand for copper, iron and oil. Higher standards of living accompanied the global boom, spurring greater demand for food as people the world over began to demand more resource-intensive foods, such as meat. This has been great news for countries whose economies are dominated by agriculture, such as Argentina. In addition to these “real” economic factors, a massive pool of global capital prompted increased speculation, and traders began to bid up the price of basic goods traded on the international markets.
We expect that the shakeup of financial markets will reduce trader speculation on food commodities, bringing prices down even further from their recent highs, though it is difficult to determine how much of the price increases are attributable to this factor. In food commodities, such as rice, wheat, corn and soybeans, there will be some amelioration in demand as lowered incomes lead to a shift in consumption patterns. However, there are some structural constraints — including increasing demand from a rising global population and limited room for the expansion of production — that will likely prevent food prices from falling to the lows of three years ago.
Falling commodity prices will have mixed results in Latin America. On one hand, the region has suffered severely under rising inflation driven by rising costs. High prices of some foods have caused great economic distress and, in some cases, civic unrest. Thus, a drop in the cost of food will be a relief to many. On the other hand, major agricultural states — Argentina in particular — will suffer from a rapid loss of income. This will affect not only local industry, but also the governments that depend on that industry for tax revenues.
In the real economy, there will be lowered demand for primary minerals as industrial production slows. This will depress extractive sectors, including Chile’s copper industry, one of the largest in the world. As oil markets sink on a global industrial slowdown, there will be similarly mixed results. For oil-poor countries that rely on the international market (or Venezuelan generosity) for oil supplies, the falling price of oil is a godsend. Countries like Chile, or Central American states that have to import nearly 100 percent of their oil consumption, will finally have some breathing room as costs fall for their industry and transportation sectors. This will be an economic boon, and it will also help to resolve civic unrest at a time when unions across the region have been pressuring governments through strikes.
But in states for which oil is a driving political and economic force — namely Venezuela and Mexico, where petroleum taxes make up 40 percent of government revenue, and Ecuador, where they amount to 30 percent of government revenue — the fall in the price of oil is a disaster. Venezuelan President Hugo Chavez has unabashedly bet his entire administration (and foreign policy) on the ability to translate oil into a higher standard of living for his constituents, who view Venezuela’s oil wealth as a national birthright.
Even in Brazil, Latin America’s rising star, there is danger in the falling oil markets — a danger that is exacerbated by the credit crunch. In the past year, Brazil has discovered vast reserves of oil that will make it one of the world’s top 10 oil producers. But Brazil’s deposits are only just accessible with current technology, and Brazil’s state-owned oil company Petroleos Brasileiros (Petrobras) is counting on substantial technological developments in order to efficiently extract the oil. This extremely capital-intensive process will depend on both the availability of funds and the forecast price of the extracted oil. Current conditions indicate that Brazil’s plans to tap its massive reserves will be delayed.
Who is at Risk?
Many states, Chile chief among them, have taken the opportunity afforded by prosperous times to pay down substantial portions of their debt and have fostered diversified economies with limited government intrusion. Countries with well-developed commodity markets that are also well-managed, such as Chile’s copper industry, have a buffer that will give them breathing room in situations where massive cash outlays are the only way to stave off crisis.
Other economies, such as Bolivia and Paraguay, are so well-insulated from the international system by the dubious virtue of underdevelopment that the financial crisis will have much less of an impact.
But several states walk a fine line — particularly Brazil. Brazil is generally characterized by a good and improving investment climate, a growing and increasingly efficient industrial base, and a promising array of natural resources at its fingertips. But Brazil’s well-developed financial industry has left the country exposed to reeling global financial markets reacting to the U.S. financial crisis. Brazil’s currency, the real, has taken a 16 percent hit so far. As a result of this devaluation, the private sector has already reported expected losses of about US$28 billion, or 2 percent of GDP. But news of the devaluation is not all bad, as it will give a kick to the Brazilian export sector, and although Brazil’s debt is high (about 45 percent of GDP), its external debt is only fraction of that — about 5 percent of GDP.
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