Latin America: Adjusting Plans

by Dave

Latin Business Chronicle

[P]ost-mortem analysis, [after deleveraging driven by financial crisis] indicates that currencies in Latin America were over-inflated and the 30 percent downturn will likely settle at a 20-25 percent decline, proving to be a healthy correction that brings some much needed competitiveness back to the region’s export industries.

That analysis, however, is appropriately limited to the region’s key investment markets, namely Mexico, Brazil, Colombia, Chile and Peru, which capture most of the region’s inbound FDI. The difference between correction and devaluation is that, historically, Latin America experienced devaluations under conditions of high foreign debt and poor financial management that led to spiraling inflation and further devaluation. This time around, the big five markets mentioned above all share well-trained ministries of finance, record levels of foreign reserves, conservative levels of foreign debt, and a rapidly maturing political class that understands the need for fiscal prudence. The investment grade standing of the sovereign debt of these five countries is being put to the test and, thus far, is winning.

CORPORATES: ACHILLES HEEL

Where this financial crisis has revealed real weakness in Latin America is in the irrational exuberance of its rapidly growing and highly indebted corporate sector.

While the big five investment market finance ministries were busy
paying down debt since 2003, the corporate sector piled on record debt
levels at unprecedentedly low rates, available in large measure due to
the prudent behavior of their home market’s central banks.  In Brazil,
private sector debt grew at an astonishing 34 percent per year on
average during the boom years.

 Latin American corporate indulgence in debt will prove costly in
2009 when loans come due and need to be renegotiated at elevated
rates.  Many of those highly leveraged firms include the region’s
largest exporters, who faced ever shrinking margins from 2007 through
the second quarter of 2008 as their currencies appreciated rapidly
against the dollar and even against a strong euro.  As currency losses
crept upwards, several dozen large exporters took on hedging contracts,
betting against the dollar.  When the region’s currencies declined,
these exporters began realizing massive derivative (hedging) losses,
which continue to be counted as their contracts mature.

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