| | |  Business News | October 2008 
The Financial Crisis In Latin America - Part 3
 Stratfor
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This reduces its vulnerability to external creditors and gives it more ability to borrow externally. Brazil also has a nest egg of some $200 billion, which has helped to halt the free fall of the real and will come in handy as the country reacts to the slowdown.
Some states do not walk a fine line so much as stare down the gullet of the beast.
Small states, including Nicaragua and its Central American neighbors, have found themselves burdened with high debt-to-GDP ratios, large budget and current account deficits and weak, limited private sectors. High reliance on remittances from the United States will inevitably hurt these economies as the U.S. economy slows. These states run serious risks of economic crisis with little institutional capability to control or respond to the situation. However, if Nicaragua suffers a meltdown, its small size precludes any serious contamination of other economies.
This is not true of Argentina, Venezuela and Mexico, all of which have deeply worrying vulnerabilities to the current economic crisis. Argentina’s penchant to increase government spending as the answer to any problem has led the country into a situation where public debt is rising to near pre-2002 default levels, and the private sector is being crowded out as the government takes a increasingly strong hand in regulating and nationalizing important sectors of the economy. The net effect of this phenomenon is a reduction in the amount of credit available to the private sector and a stifling of the economy’s ability to grow on its own or recover from slowdowns. The long-term effect of a heavier government hand is a slowdown in Argentina’s overall development. A dd to that the fact that the government routinely manipulates its economic statistics and seems to have no clear plan of action, and it is apparent that Argentina is an increasingly unstable country with little room to respond to looming challenges.
In Venezuela, increased reliance on oil for funding massive social programs has put the country at risk of shortfalls as oil prices fall. Venezuela’s 2009 budget will bank on an oil price of $60 per barrel of its heavy, sour crude. With the higher-quality Brent blend crude futures trading at nearly $61 per barrel, Venezuela’s projection is uncomfortably close to the real price of crude. Though Venezuela does not run the same debt risks as its Latin American neighbors, it might find itself in need of a loan at a time when international credit is nigh impossible to secure, particularly for such an unreliable state. At minimum, the Chavez government will need to decide which of its expensive pet projects to cut.
Finally, Mexico — the source of the last two regional crises — poses grave concerns. Mexico is not only reliant on the United States for remittances, but it is also deeply enmeshed in the U.S. economy through trade. As the United States falls, so does Mexico. On the upside, as the United States pulls out of its upcoming recession, Mexico will follow. However, Mexico does not have the same capacity for recovery that the United States enjoys. With 80 percent of Mexico’s banking system owned by foreign interests, the country is highly exposed to international credit markets at a very fundamental level — far more than any other Latin American state. Any threat to that sector could cause a banking collapse in addition to a capital shortage. Finally, at the same time that Mexico is pouring billions of dollars into bailing out the peso and proppi ng up Mexican businesses, the government is waging an expensive war against some of the best-funded and most highly organized criminal groups in the world.
Political Endurance
This brings us to the final piece of the puzzle: political endurance. For all of Latin America, there are two critical political factors to consider as we look ahead to the region’s adaptation to the global slowdown: the role of the military and the role of the people.
In the economic downturn of the 1960s, Latin American militaries staged a series of coups — Brazil’s in 1964, Argentina’s in 1966 and Chile’s in 1973 — designed to establish autocratic control over deteriorating economic situations. In more recent decades, popular movements have come to the fore and brought to power leaders like Venezuela’s Chavez and Bolivian President Evo Morales. This was aided in no small part by a resounding rejection of the human devastation wreaked by the military regimes as they sought to quash (often leftist) opposition movements. It was also aided by the fact that these earlier military regimes failed to solve the economic problems that led to their original rise, so movements toward civilian governments began to gain traction.
With this history in mind, we must watch carefully both for rising public discontent that could throw countries into chaos and trigger their governments’ downfalls, and for movements on the part of the military to consolidate control. In many cases (such as in the downfalls of three of the past four Ecuadorian presidents), Latin American militaries will step in to control the government once rising public discontent has made the civilian government irrelevant, then turn the government over to a new civilian administration.
It is fair to say that there is not a single Latin American country that is immune from civic unrest. It is a defining characteristic of politics in the region. Poor income distribution, coupled with ethnically divided economic classes and a widespread approbation of public participation in government, provides a wealth of motivation for the public to censure the government via civic unrest. But unless sparked by truly massive grievances, high levels of organization or outside financial support (or all of these factors), these protests usually do not threaten the stability of the state.
That said, it will be particularly important to watch the economically endangered countries for signs of destabilizing civic unrest. In Argentina, a sincere devotion to the art of protesting led the entire agricultural sector to shut down the country for brief periods of 2008. With trouble ahead and a shaky government hand, should the country’s economic situation decline radically, Argentina could see a replay of the bloody riots of 2002 in the wake of the economic crisis and the debt default. In Venezuela, the opposition is becoming increasingly organized and more popular among the country’s poor, who have begun to suffer under Chavez’s economic mismanagement. In Mexico, protesting is something of a national sport. With an ongoing war on drug cartels, rising crime, an energy industry that is nervously approaching total failure and an increasingly strained government budget, the situation in Mexico is precariously close to an economic disaster that would unquestionably spark massive civic unrest.
Falling commodity prices and shrinking international credit will impact all of Latin America. The conditions for social unrest will become more prevalent, and those wishing to influence the status quo will have their chance. This could happen through a number of domestic actors, but we must also remember to look for signs of instability from outside. As Russia seeks to increase its influence in the region, the economic downturn will create opportunities for greater partnerships with Latin American states — as well as more potential discontent that could be exploited to produce greater instability. In the end, the impact of the financial crisis on Latin America will be determined by the degree to which Latin American states can maintain stability until the global economy begins to recover.
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