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Can Latin America handle another global shock?

Latin America's insertion into the global economy. Source: Google Images

A decoupling of emerging markets from the struggling developed world is a myth, as we saw in 2011 when euro and US shocks caused a sell-off in EM currencies, including in Latin America. Next year could be rough as global growth slows. Countries from Brazil to China are rushing to reverse their earlier policy tightening. Softening Chinese demand should result in flat to softer commodity prices, affecting most countries in Latin America. The big wild card for growth will be the euro zone again. On this, it is challenging to be optimistic. Latin Americans borrow substantially from European banks, and so access to capital may be muted.

So, which countries in Latin America are best able to weather what’s coming in 2012? Countries with strong external balance sheets, macro policy flexibility, sizable domestic markets, and stable politics. Brazil generally passes this test, but its ongoing slide into stagflation — inflation above target and growth below 3% — suggests some limit to policy flexibility. Watch out for the Venezuelan election because no one knows what a post-Chavez world will look like. Mexico’s seems well-positioned for 2012, given a competitive exchange rate and rising exports, some dynamism north of the border, policy flexibility, and what looks to be a fairly quiet electoral season on the horizon. Yet Mexico is vulnerable to just the sort of developed market crisis that beckons toward year-end 2012: namely, a sell-off in the US dollar that could result from America’s inability to solve its government debt problem.

 

Author

Roger Scher
Roger Scher

Roger Scher is a political analyst and economist with eighteen years of experience as a country risk specialist. He headed Latin American and Asian Sovereign Ratings at Fitch Ratings and Duff & Phelps, leading rating missions to Brazil, Russia, India, China, Mexico, Korea, Indonesia, Israel and Turkey, among other nations. He was a U.S. Foreign Service Officer based in Venezuela and a foreign exchange analyst at the Federal Reserve. He holds an M.A. in International Relations from Johns Hopkins University SAIS, an M.B.A. in International Finance from the Wharton School, and a B.A. in Political Science from Tufts University. He currently teaches International Relations at the Whitehead School of Diplomacy.

Areas of Focus:
International Political Economy; American Foreign Policy

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