Terms of Trade and External Sector Outlook
A weaker global backdrop would also hit the region’s external accounts. As a result of lower commodity prices, the regional terms of trade would drop by almost 15% in 2009. Falling commodity prices in the wake of slower world growth will result in a deterioration in the terms of trade for the region as a whole, although the actual effects will vary from country to country. The rate of increase in commodity prices rose steadily between mid-2007 and mid-2008.
Lower Growth Abroad: Impacts on Latin Countries
The strengths and cushions that we have talked about for years for Latin American countries and which were the hallmark of the boom cycle of the last five years will help cushion the decline in growth, but they cannot prevent it. In our view, the following factors are the key drivers of our downward revision to growth:
- We should observe the US, UK, EU and Japan to dip into recession in 2009. This will make an important dent on Latin American exports;
- Exports in Latin countries might be impaired also due to the lack (or decrease) of funding coming from foreign banks. The 40% decrease in commodity prices suggests a decrease in Latin countries exports and hence a decrease in their prospective growth. The fact that high commodity prices helped fostering growth (the Roubini’s ‘good luck’ argument) in Latin countries will act in the opposite way;
- Flight to quality and the fact that credit conditions have become more restrictive also suggest that domestic consumption in Latin economies tend to observe a significant downturn. Indeed, private consumption will be assailed on all fronts: 1) banks are tightening lending standards and reducing credit; 2) employment conditions are likely to worsen and have already deteriorated sharply in some countries; 3) consumer confidence is already very low in most countries; and 4) for those countries that depend on them, remittances are also falling.
- The pace of investment witnessed in recent quarters will have to slow on account of tighter credit conditions, lower growth prospects and falling commodity prices;
- Countries’ ability to conduct countercyclical fiscal policies will be challenged by falling revenues, especially those derived from commodities. There remains a distinction among Latin countries with Chile (and to a less extent Brazil) in implementing a more active counter cyclical fiscal policy than Venezuela, Argentina and Bolivia;
- Corporate balance sheets exposed to the recent currency move will need to be rebuilt. There are 38 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.