Wall Street analysts have issued bearish forecasts on Latin American economic growth, with Morgan Stanley slashing its forecast for the region to 1.5%, down two percentage points from 3.5% previously.
The IMF has also revised its growth forecasts downwards. It is less pessimistic than private sector analysts, but expects an average of 3.5% growth in Latin America next year, compared to an annual average of 5.5% over the past five years.
Some countries will suffer a harsher blow than others as the impact spills over into the real economy and curbs growth, according to the IMF.
“There are countries in the region that had very rapid rates of growth of public spending, where there is perhaps more fragility in their economies, especially oil dependent economies faced by sharp slowdown in revenue growth”, Charles Collyns, deputy director of the IMF’s research department, told a briefing in Washington.
“So some countries may need indeed to take action to cut their spending growth in response to the changing global environment.”
The general picture, however, has improved, Collyns said. “We do not see the major pressures on the fiscal position that we have seen in previous downturns. It is encouraging that there is more fiscal room in these economies to help cushion the impact of the global economy in their economies,” he said.
Brazil and Colombia, which currently enjoy healthy fiscal records, may become vulnerable as their current account deficit widens, according to Liliana Rojas-Suarez, senior fellow at the Center for Global Change in Washington DC. “Among emerging markets, Brazil is among the fragile economies alongside Eastern European countries and Turkey,” Rojas-Suarez said.
Countries that have failed to diversify their economies will be hit hard, especially large oil exporters, observers warned.
“There is hardly any industry left in Venezuela beyond the oil sector,” said Augusto de la Torre, chief economist at the World Bank. “It is going to be a great shock.”
He said Argentina would also be exposed to a “vertiginous fall in commodity prices”.
Nevertheless, stock market volatility and the credit crunch will soon hit trade, which will especially hurt countries closely linked to the US, such as Mexico. Remittances from migrant workers have already dwindled.
As public expenditure soars against a background of falling commodity prices and diminishing tax revenues, some Latin American economies may yet fill the pinch.
Alexandre Schwarstman, chief economist at Santander in Brazil, said: “It may well be that all cats look grey at night, but we’ll soon figure out that some cats are grey and others aren’t that much.”