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how would a USA recession effect Latin America

Page history last edited by Brian D Butler 15 years, 2 months ago

 

credit crisis of 2007

 

One of the biggest effects is that companies in emerging markets that need to raise new money will find it more difficult to do so.   Per the Financial Times (09/2008): "Of the $111bn in bonds (globally emerging markets) that will mature between now and the end of 2009, $24bn worth are held by junk-rated groups that have almost no hope of tapping a market that has become averse to risk."

 

 

 

Table of Contents:


 

 

 

 

 

 

Effect on Brazil:

 

Companies listed in the Stock market had lost R$ 1 trillion in the market: October, 2008

 

 

Brazil is currently (early 2008) doing well because of credit has been relatively easy to find,  payment spans have been generous, and interest rates have been lower than in years, which has been sustaining consumption.  Also, there have been little signs of greater default, which is now stable,"

 

The industry that has done the best has been auto vehicles, up 15.2%. "The auto industry showed a reduction in exports in 2007 and ended up leading the performance among industrial sectors supported mostly by the greater domestic demand," stated Sílvio Sales.

 

But, the crisis in the United States should certainly affect Brazil, as it should all countries in the world, especially the emerging markets, but its still too early to forecast the intensity of the shock.

 

While credit is accessible to Brazilian consumers,  industry should continue selling. "The sectors that influenced the growth the most in 2007 were those answering to credit, like vehicles, furniture and garments. If instalments continue fitting in people's pockets, consumption should continue growing," stated Mol.

 

the Auto sector in Brazil will hurt if consumer credit gets cut off, which could happen as credit markets around the world get tighter...especialy if global concerns of inflation rise, and if central banks raise the interest rates.

 

RISK:  credit crunch in the US...could it lead to reduced credit flows to Brazil?  Will this shock reach Brazil?

 

 

 

 

Credit Crisis effect on BNDES:

 

10/2008:  As a result of the credit crisis blockade it credit caused for world-wide the financial crisis, the president it BNDES (Brazilian Development Bank), Luciano Coutinho, affirmed that the bank can need R$ 40 billion adds in 2009 to take care of to the order of Brazilian companies

 

 

 

Stock markets in Brazil feel the crunch

 

In Brazil, world financial turbulence has resulted in a net loss of US$ 1.8 billion in the local shares and bonds markets during January. "Global financial and credit market turmoil has prompted investors to cash out of short-term investments that aren't directly related to the economy's future prospects, leading to an outflow of US$ 1.8 billion from Brazilian stocks and fixed-rate bonds so far this month,"

 

 

More concerns for Brazil

 

Domestic Brazilian growth will be fuelled by private consumption in 2008, so anything that reduces private consumption (such as a reduction in consumer credit), would harm Brazil's growth.   There is a concern that heated domestic demand, rising food prices and a weaker exchange rate may pressure inflation in 2008 and 2009, leading to retail price increases for consumers.

 

recession in the United States and reducing the speed of growth in China and other Asian tigers was enough to down the prices of key agricultural commodities and minerals, which should affect the trade balance

 

"The bubble that is dissipando will bring harm to some industries and a possible slowdown of activity," he said. In banks and consultancies, forecasts of growth of the Brazilian economy in 2008 already have been reduced from 5% to 4.5% - or even less.

 

Analysts who gave the detachment of the Brazilian economy begin to review their positions. "It is not true to say that the country is armoured," says the professor of economy of the FGV-RJ Nora Raquel. "The United States are the largest buyers of Brazil. There is no way to move unharmed by a recession." The American economy represents 26% of world GDP and absorbs 17.8% of Brazilian shipments.

 

Among the sectors that puxaram Brazilian exports last year, the agribusiness is on alert. The prices of the commodities closed Wednesday 23 with a strong fall for the second consecutive day. "If the recession is serious, can generate a domino effect with crisis in demand in Europe and Asia, causing a fall in prices of commodities," evaluates the former Minister of Agriculture Roberto Rodrigues. For him, however, is the time of observation rather than panic. Rodrigues agrees with the chairman of the Abicalçados, Heitor Klein.

 

Many cite rapid domestic growth in Brazil as further evidence of its reduced dependence on external markets. But Christian Stracke of CreditSights, a research firm, says growth has been fuelled by local banks tapping global liquidity.  (if that liquidity dries up...will Brazil hurt??)

 

 

 

Tighter credit....will it hurt the auto industry? home sales?  and consumer demand?

 

Walter Molano, of BCP Securities, says credit is becoming less abundant in Brazil. Market interest rates have crept up in recent months, while conditions on car loans – the first boom sector of recent years – have tightened this year. “There is no way the region can avoid fallout from what is happening internationally,” he says. “There is a cushion but it will disappear.”

 

 

 

 

News Article from FT.com

 

Business as usual in Brazilian credit markets 

By Jonathan Wheatley in São Paulo

Published: February 12 2008 22:34 | Last updated: February 12 2008 22:34

 

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Brazil’s credit markets are shrugging off the effects of the US subprime mortgage debacle and maintaining business largely as usual – another sign say analysts of emerging markets “decoupling” from developed ones.

 

“Very little has changed in Brazil’s as a result of the crisis,” says Antonio Quintella, head of Credit Suisse’s Brazilian operation in São Paulo. “Of course conditions are somewhat more difficult, spreads are up and the pace of business is slower but, overall, credit markets are calm.”

 

Brazil’s capital markets as a whole have been far from immune from global instability. The São Paulo Stock Exchange (Bovespa), which since 2004 has seen a flood of companies coming to market after years of inactivity, has again ground to a halt. Last year, 64 companies floated on the main market of the Bovespa, raising R$55.5bn ($31.9bn). This year, not one has floated.

 

Carlos Alberto Rebello, head of listings at the CVM, Brazil’s securities commission, says 15 companies have suspended requests for share issues with a combined value of about R$7.7bn.

 

Another 14 have failed to launch roadshows for offers worth another R$6bn. A further 14 issues worth about R$10bn are due between February and April. “I doubt very much if they will stick to their timetables,” Mr Rebello says.

 

Those companies that floated last year have been particularly badly hit by falls in stock prices this year, falling much further than the main Bovespa index.Some 75 per cent of their shares were sold to foreign investors, who have turned to the Bovespa’s liquid market to raise cash to cover losses elsewhere.

 

But Mr Quintella says companies have found it relatively easy to raise capital from other sources.

 

Bank lending is the biggest, and the most visible example is Vale, the Brazilian mining giant, which has reportedly had little difficulty raising a loan of $50bn for itsbid for Xstrata, its Anglo-Swiss rival. It is understood that JPMorgan offered Vale $10bn that it did not need.

 

In Brazil, companies have benefited from a steady expansion of available credit. Brazil’s total stock of credit, at about 35 per cent of gross domestic product, is still much smaller than in many other markets. Brazilian companies have much less debt than many foreign competitors so their situation, says Mr Quintella, “is still relatively comfortable”.

 

Some analysts have warned that, because Brazilian banks raise some of their capital overseas, the credit that has driven recent growth on Brazil’s domestic market is bound to dry up. But Mr Quintella disputes this, pointing out that the steady advance in savings in Brazil has been driven by investments in fixed income instruments that are, in effect, closed to foreigners by taxation.

 

“Our sources of credit are essentially domestic,” he says.

 

Most economists believe Brazil is bound to be hurt by the expected slowdown in the US and global economies this year. But many companies are betting on the domestic market to make up the difference. For them, investment capital is still available.

 

 

 

 

Effect on Latin America

 

Latin America has done well recently because of:

 

1.  Booming commodity prices,

2.  abundant liquidity in financial markets and

3.  the expansion of export markets

 

 

But developments in global markets this year suggest Latin America may be losing its lustre. Stock markets across the region have fallen faster than most of the rest of the world, with an average decline of nearly 16 per cent since the beginning of the year.  There are fears that a US recession and falls in prices for industrial commodities could undermine growth. As the Argentine central bank put it on Wednesday: “For our country this is the first stress test since the crisis of 2001 and 2002.”

 

Many say the gloom is overdone. The US may be declining but the robustness of other emerging markets, especially China, will help Latin America weather the storm, they say.  In the longer term the region’s markets are “negatively correlated” in relation to Europe and the US, says Jerome Booth, head of research at Ashmore Investment Management in London. “I wouldn’t exactly call it ‘decoupling’. But emerging markets are more resilient.”  He cites the continued flow of funds into local currency bonds and other fixed income investments. As measured by the EMBI – an index developed by JPMorgan – the prices of emerging market bonds reached an all-time high last week.  Many argue that most Latin American countries are better prepared to face global financial instability than in the past.

 

Reasons not to worry:

 

1.  Fiscal policy is generally more conservative,

2.  domestic demand has been growing

3.  several years of current account surpluses have allowed governments to build up significant international reserves.

4.  there has been a decline in dependence on the US, which now absorbs under 20 per cent of exports from Brazil, Argentina, Chile and Peru.

 

Guillermo Ortiz, governor of Mexico’s central bank, this week told an audience at the World Economic Forum in Davos: “Latin America today, from a macroeconomic perspective, is as solid as it has ever been – at least in my lifetime.”

 

 

On the other hand....

 

1.  other countries in Latin America are still very dependent on exports to the USA

2.  Industrial commodity prices would be likely to fall, which will effect many (if not all) countries in Latin America

3.  Many governments have not taken advantage of favourable international conditions to introduce reforms that would increase productivity and long-term growth prospects.

    examples :  Venezuela and Ecuador have used the bounty from increased oil revenues to jack up social spending.

                       Brazil too has been increasing spending. Little has been done to reform a profligate pension system and the tax burden has increased.

 

 

4.  many emerging markets are particularly vulnerable, as the amount of money they have attracted in portfolio investment is as high as it has been since shortly after the Asian crisis of 1998. Outflows could become a torrent if sentiment stays bad

 

 

 

 

 

Opinions from LinkedIn "answers"

 

see conversation here

 

 

 

 

 

Perhaps there is a positive side for Brazil...

 

A slowdown in demand for commodities will likely be one factor that would help depreciate (drive down) the value of the Brazilian currency...which could help the export sector in manufactured goods (which has long had an unfair disadvantage against the undervalued Chinese currency).  This would be good for the large and hungry manufacturing industry in Brazil (if it could be more export oriented).  If the currency were to devalue, that might make exports of manufactured goods more competitive in the world market.

 
"The exchange rate can help to offset the drop in demand," says the professor of FGV Ricardo Araujo. 
 

 

 

 

 

 

 

Can China & Europe pull us through this crisis (and avert recession in latin America)?

 

   see our discussion about the Rising importance of China  

 

China is definitely one of the strongest engines of the global economy, along with the United States, Japan and Germany. But their participation in the cake is growing. If in 1996 had 9.3% of world GDP, ten years later abocanhava 15%, that figure should have risen to 18%. The USA, in the same period, exited from 21.1% in 2006 to 19.7% and still falling, according to data from the International Monetary Fund (IMF). One foot on the brake coming from the United States is sufficient to reduce growth worldwide. But it many not beso powerful to the point of throwing the planet into a spiral recessive, as occurred in previous crises.

 

The axis has changed. The emerging countries, at an accelerating pace, and the Europeans, more moderate, can keep reasonably optimistic scenario in 2008. "The current economic cycle, which began in 2003, is very vigorous and less dependent on American activity," says the economist Zeina Latif, the Bank Real. "There is no doubt that the economic influence of the United States fell," confirms Didier Cossin, professor of finance of the International Institute for Management Development (IMD) in Switzerland. One of the signs that something has changed time is the weakening of the dollar against the euro (graph). But it is not the only one.

 

The four of the so-called BRIC countries (Brazil, Russia, India and China) accounted for more than half of global growth in 2007. The China emplacou a third of the increase in GDP.  And the Chinese domestic market is exploding, both in consumption and in investment

 

but, does any of this mean that there is no strong correlation between US economic activity and Latin Americas?  I dont think so.  This seems a bit like a mixture of wishful thinking, and America bashing to me.  I need to see some data.

 

 

 

 

 

Correlations - decoupling

 

A recent IMF paper examined regional correlations since 1870. The paper, which was written by Marco Aiolfi, Luis Catão and Allan Timmermann, is called ‘Common Factors in Latin America’s Business Cycles.’ The link to the site is http://www.imf.org/external/pubs/ft/wp/2006/wp0649.pdf. In order to commence the exercise, the three economists reconstructed GDP levels for Argentina, Brazil, Chile and Mexico for the past 140 years. Although there was good historical data on sectorial activity and trade, most of the countries in the region did not standardize their national income accounts until after Bretton Woods. Therefore, the IMF economists used backcasting techniques to reconstruct the GDP levels. Not surpsingly, the data revealed a great deal of correlation between the four major Latin American countries and the international economy.

 

The data showed that the correlation between the four major Latin American countries and the international economy averaged 25% since 1870. That is to say that the region’s level of economic activity was largely affected by changes in external demand. The degree of correlation fell to 12% from 23% after 1930. The onset of the Great Depression marked a political shift to the Left, and many of the Latin American countries adopted import substitution policies to bolster domestic production and boost employment levels. However, the collapse of the import substation regimes in the 1970s led to a gradual reintegration with the global economy. As a result, Latin America’s correlation with the international economy increased to 42%. The data also showed that the region was very sensitive to changes in international interest rates. The level of correlation steadily increased since 1870, showing a negative correlation of 19% until 1930. In other words, increases in international interest rates had a negative impact on Latin American economic activity. The negative correlation increased to 20% until 1970, and it reached 23% in 2004—when the data set ends. The data set also showed that the correlation between the four large Latin American countries was extremely high, averaging 72.5% since 1870. The interesting thing is that trade and capital flows between the four countries was nil. Therefore, they were all affected by common external factors.

 

The IMF study, which was completed prior in 2006 (prior to the current downturn), counters the decoupling theory. Investors, bankers and analysts in Brazil and Colombia are particularly vehement in their argument that their countries are immune to the U.S. credit crunch. However, the same crowd in Mexico, Chile and Argentina seemed to be more resigned to the fate that lies ahead. The commodity boom of the past 5 years led to greater aperture of the Latin American economies, with trade becoming a larger component of GDP. This increased their vulnerability to changes in external activity. However, the privatization of the domestic pension fund systems gave several of the Latin American countries larger pools of domestic savings to mitigate their dependency on external capital. Therefore, some of the countries may be slightly more resilient to changes in international interest rates—but they are far from immune.

 

The historical record clearly shows that Latin America is very susceptible to changes in the international environment. The ability of countries to confront external shocks is predicated on their ability to adjust their levels of domestic demand in the face of international volatility. So far, countries such as Brazil, Colombia and Venezuela, are not doing anything to prepare for the gathering storm. GDP forecasts remain high and government spending continues to rise. Other countries in the region are acting more prudently, taking steps to prepare for the deterioration in external conditions. However, one thing is certain. The data shows that the common fate of Latin America hinges on the health of the international economy, particularly the U.S. Therefore, the notion that some of the countries in the region will magically decouple from the global economy is contradicted by 140 years of historical evidence.

 

 

 

 

Will it be different this time?  Will Latin America avoid a recession?

 

The situation in Latin America is different today than it was in the 1970s when Latin America was also booming, but then slid into depression in the 1980s (the lost decade).   But, are the differences enough to mean that the same result will not happen?   It was commonly said in the past that when the U.S. caught a cold, Latin America got pneumonia.   By that measure, the shivers in the U.S. economy should have already sent chills throughout Latin America, but that does not seem to be the case, at least not on the surface.
 
Here is one economists view:   
 
It is widely believed that the recent Latin American economic boom represents a significant break with the past: the region has been growing rapidly while running current account surpluses versus a tradition of running large deficits. This, it would seem, has made Latin America more similar to the East Asian economies.  
 
If so, accumulated international reserves, which have also been booming in recent years, would reflect true savings.
 
This impression is partly correct. In the 1950s and 1960s, Latin America grew rapidly while running small current account surpluses (small deficits if Venezuela is excluded). From the 1970s, however, rapid growth was always accompanied by current account deficits. This was the story of the 1970s and 1990-1997, with the latter period showing less impressive growth performance. In both cases, however, the need to correct the current account deficits eventually led to recession: the “lost decade” of the 1980s and the “lost half-decade” that followed after the Asian crisis.
 
Fast growth came back in 2004 and has been accompanied since then by current account surpluses. Although such surpluses are associated with booming commodity prices rather than competitiveness, it is still a major gain in relation to the past. The 1970s were also years of booming commodity prices but accompanied by current account deficits. Current account surpluses have been used to reduce external debt ratios and accumulate international reserves. As a result, Latin America is better prepared than in the past to undergo the current turbulence in international financial markets.
 
The recent story is only partly correct, however. To start, current account surpluses are a characteristic of a few (indeed, increasingly fewer) economies. If we take out Venezuela, the regional current account was basically in balance, not in surplus, in 2007. The countries running current account surpluses were mainly mineral economies –Bolivia, Chile, Ecuador, Peru and Venezuela—, which have benefited from booming mineral prices on the world market. The only exception to the association with mineral price booms is Argentina. Brazil was until recently also an exception, but ran a deficit in the last quarter of 2007 and is likely to run one for the whole of 2008.
 
Furthermore, the large accumulation of international reserves is associated with capital flows, not to current account surpluses. This is clearly indicated in the attached graph, which shows the aggregate current and capital account balances of the six largest Latin American economies (the other one is Venezuela, which displays very different behavior, more akin to that of the oil exporting economies of the Middle East). The pro-cyclical performance of capital flows is clearly shown: although foreign direct investment helped to generate a small recovery of capital flows in 1999 and 2000, after the initial effect of the Asian crisis, net capital flows fell in 2001 and were essentially zero from mid-2002 till mid-2004.
 
In mid-2004 capital flows came back, with strong winds. Two episodes of “exuberance” in international financial markets explain such force. The first started in mid-2004, when Latin American spreads in international financial markets fell below the pre-Asian level and capital flows started to generate a boom in Latin American stock markets. This was temporarily interrupted by the disturbances in international financial markets in May 2006, which were centered in China. This first episode was followed by an even stronger capital account boom from mid-2006 to mid-2007, which was interrupted, in turn, by the sub-prime financial crisis in the United States.
 
Viewed as a whole, it is the latter period that generated the largest accumulation of international reserves in Latin America, and their origin was the capital, not the current account. About three-fourths of the accumulation of reserves since 2004 (slightly over $210 billion from the first quarter of 2004 to the third quarter of 2007, for which we have data for all six economies) is the result of capital flows, and the proportion has been closer to 90% since the last quarter of 2006. So, Latin American reserves are largely “borrowed”. The source is different from the past: there has been a larger proportion of portfolio capital inflows invested in Latin American stocks and bonds denominated in domestic currencies. This again has several advantages, as it has reduced the risks associated with the increasing domestic burden of debts after exchange rate devaluation, which were devastating during past crises.
 
Therefore, it is neither competitiveness nor high commodity prices that explain the large amount of international reserves that the region has accumulated, but pro-cyclical capital inflows. The future will show whether these “borrowed reserves”, with their new features –i.e. the composition of the inflows—, are more resilient to an international financial crisis than in the past.
 

Latin America EconoMonitor 

www.rgemonitor.com 

Jose Antonio Ocampo

Professor and Co-President of the Initiative for Policy Dialogue, Columbia University. Former Under-Secretary General of the United Nations for Economic and Social Affairs, Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean, and Minister of Finance, Planning and Agriculture of Colombia.

 

 

 

 

 

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