"If you wanted to pinpoint the moment when things got particularly bad for Latin America, August 1982 wouldn’t be a bad choice. The emergency warning that month that Mexico was on the verge of default was the first in a decade-long series of regional debt crises. It’s a rare Latin American nation that wasn’t forced to grapple with out-of-control inflation, a stagnant economy, plummeting wages or high unemployment during the so-called “Lost Decade.” And even though 30 years have passed since the unofficial start of the bad times, the misfortunes of the era still loom large in our collective memory''
. There’s no question that the area earned its reputation as the international economy’s problem child, but, according to a February 3 report from the Credit Suisse Research Institute entitled “Latin America: The Long Road,” the region has been advancing over the past two decades and is poised to extend its gains. Poverty has declined, inflation has slowed and political stability has improved. Not only is Latin America no longer a trigger of global disorder, it has proved resilient to financial crises generated elsewhere, including the Great Recession. That’s certainly a break from the region’s volatile past, when disturbances in the world economy routinely had a very negative impact on its domestic economies. “The last 20 years have been a crucial period as they represent the most radical change in the political, macro and social structures of Latin America in the last two centuries,” says the report.
Since the early 1990s, many Latin American countries, have been modernizing their economies by strengthening their service and manufacturing sectors, approving key structural reforms and boosting long-term investment. Latin America now exports a higher proportion of its goods to Asian economies, resulting in a more diversified roster of trading partners, inflation has come under control, and political regimes in many countries have become more democratic.
The upshot? Now that an extended global commodity boom is waning, the region isn’t at risk like it was the last time that happened, in the 1980s. Even though the collective current account balance recently hit deficit territory, several other indicators suggest that Latin America is well positioned to absorb external shocks. The region boasts an external debt-to-exports ratio of around 100 percent, which is half its level in 1980 and similar to other emerging markets. The external debt-to-GDP ratio of 24.5 percent is only 4 percent above its 30-year low, total reserves excluding gold were at a near-record high of 60 percent of external debt at the end of 2012, and the capital-to-assets ratio of the region’s banks was 10.3 percent in 2012, compared with an OECD average of 7.4 percent.
. There’s no question that the area earned its reputation as the international economy’s problem child, but, according to a February 3 report from the Credit Suisse Research Institute entitled “Latin America: The Long Road,” the region has been advancing over the past two decades and is poised to extend its gains. Poverty has declined, inflation has slowed and political stability has improved. Not only is Latin America no longer a trigger of global disorder, it has proved resilient to financial crises generated elsewhere, including the Great Recession. That’s certainly a break from the region’s volatile past, when disturbances in the world economy routinely had a very negative impact on its domestic economies. “The last 20 years have been a crucial period as they represent the most radical change in the political, macro and social structures of Latin America in the last two centuries,” says the report.
Since the early 1990s, many Latin American countries, have been modernizing their economies by strengthening their service and manufacturing sectors, approving key structural reforms and boosting long-term investment. Latin America now exports a higher proportion of its goods to Asian economies, resulting in a more diversified roster of trading partners, inflation has come under control, and political regimes in many countries have become more democratic.
The upshot? Now that an extended global commodity boom is waning, the region isn’t at risk like it was the last time that happened, in the 1980s. Even though the collective current account balance recently hit deficit territory, several other indicators suggest that Latin America is well positioned to absorb external shocks. The region boasts an external debt-to-exports ratio of around 100 percent, which is half its level in 1980 and similar to other emerging markets. The external debt-to-GDP ratio of 24.5 percent is only 4 percent above its 30-year low, total reserves excluding gold were at a near-record high of 60 percent of external debt at the end of 2012, and the capital-to-assets ratio of the region’s banks was 10.3 percent in 2012, compared with an OECD average of 7.4 percent.
That spells opportunity for investors, in our view, especially those in the consumer goods, financial services and energy sectors. Growth in the region has fueled a burgeoning middle class, which grew by 50 percent between 2003 and 2009, from 103 to 152 million people. Credit Suisse expects that upward social mobility to persist, giving consumers more purchasing power and prompting them to buy more sophisticated—and therefore more valuable—goods and services. Greater Internet coverage is fueling more opportunities for e-commerce, and an expanding economy amid slow inflation should bring throngs of new customers to the financial services industry. To top it off, recent legislation to end Mexico’s state oil monopoly, along with plans by Brazilian energy company Petrobras to double production by 2020, should fuel growth in the energy sector.
Still, the regional economy isn’t without its weaknesses. Per capita GDP remains inferior to that of the developed world, the level of technological innovation is low, and doing business in many countries can still be a red tape-filled bureaucratic jungle. And consider Latin America’s total investment in infrastructure—just 2.1 percent of GDP between 2003 and 2012, roughly half of the minimum necessary to sustain economic growth of 4.5 percent, according to the United Nations Economic Commission for Latin America. (Compare that to China, which invested around 13 percent of its GDP, or even India, which came in at 5 percent.) Two of the region’s largest countries, Mexico and Brazil, have recently announced plans to woo private investors to build roads, ports, bridges and airports, but whether they will succeed remains to be seen.
Latin America is not a monolith, of course, and there are vast disparities among its economies. Chile, Peru and Panama, for example, score in the top ranges of Credit Suisse’s adaptation of the so-called misery index, which factors in economic growth, the inflation rate and the unemployment rate. Argentina and Venezuela are in the bottom 30 percent. And even as Brazil’s middle class grew to 50 percent of the population from 39 percent between 2002 and 2009, Mexico, the region’s second largest economy, only saw an increase of 35 to 39 percent between 2002 and 2011.
For a long time, it seemed that economic news out of Latin America was always bad—the only question was how bad it was going to be. For the time being, those days are over, and the region is more likely to be garnering praise rather than prompting lectures from the rest of the world. “By any reference to its own history, Latin America’s performance during and after the Great Crisis has been remarkable,” says former Mexican President Ernesto Zedillo in an introduction to the report. “However, it would be a terrible mistake for Latin American governments and societies to be complacent about the challenges in front of them.”
Source: The Financialist by Credit Suisse
