Impact of Global Financial Crisis on Latin America

by Dave

Jorge Castaneda writing in Newsweek International Edition

[A]s Latin economies globalized over the past two decades, the number of local companies listed in New York rose rapidly. Thirty-eight Brazilian companies are quoted on Wall Street; 20 Mexican ones are; 15 Chilean; and a growing number of Peruvian, Colombian and Argentine corporations are too. They all represent large proportions of the market capitalization in their own home exchanges (Telmex alone accounts for nearly 50 percent of the Mexican Bolsa’s trading), and they all track the Dow with great fidelity.

If the Dow plunges, their value follows in New York, the fall spreads to São Paulo, and so on, and local investors flee the local exchanges and buy what the rich in Latin America have always bought: dollars. The currency plummets, central banks raise interest rates to retain money at home, and a domestic debt bubble bursts: mortgages, automobile loans and credit-card balances become unsustainable. All of this is beginning to happen, and will probably get worse before it improves.

Some countries will emerge from the current crisis better than others. Mexico, Chile, Brazil and Uruguay should manage just fine, with only bruises and scrapes; others will weather the storm, though suffering greater harm (Colombia, Peru). But others will incur severe damage: Venezuela, Bolivia, Ecuador, Central America and the Caribbean.

While many Latin banks do not depend as much on foreign credit and thus
are less vulnerable to the credit crunch than richer nations,
suppliers’ credits are key for exports, foreign loans are crucial for
infrastructure projects and foreign investment remains important for
many economies (Mexico, Brazil, Colombia, Peru).
Since much of the impressive recent growth has been commodity driven,
the fall in prices can be devastating for countries like Peru,
Venezuela, Ecuador and Argentina.