Latin America Special Report 2012
One wonders how your average Latin American policymaker has avoided developing a squint, having to keep one eye firmly on domestic markets while the other is fixed so intensely on Europe’s unfolding Greek tragedy. Yet it is a measure of how LatAm financial markets have bolstered their resilience to foreign shocks that at this juncture a squint is likely to be the worst byproduct of the eurozone crisis.
Nonetheless, ripples from Europe will still wash upon LatAm’s shores. That is a recurrent theme in this report – despite the inevitable temptation in official circles to view the Old World’s troubles with a certain Schadenfreude.
After all, the continent has weathered its own fair share of sovereign debt problems in the past, and has responded with waves of reform and restructuring so radical they would leave Europe’s finance ministers as dizzy as a trader unseated by the tequila effect. The 1982 debt crisis in Mexico mired in a “lost decade” of limping growth and painful restructuring. Argentina’s 2001 crash was only resolved at a high political and social price.
One result of the turmoil in Europe is that European banks are also retrenching and observers predict fewer syndicated loans this year. Historically, European banks have been an eager source of syndicated loans for project finance. But the debt crisis and new liquidity requirements under Basel III are likely to change how large projects will be financed in the medium term. Prices are also heading north.
Mexican companies have already been finding it harder to access the loans market because of European and US retrenchment. Brazil’s IPO-drought that began last year seems set to persist in a climate of risk aversion.
As strategic outbound M&A activity accelerates sharply at the same time as bank liquidity dries up, bonds offer an obvious alternative to syndicated finance in the medium term.
Besides, corporations in LatAm are spreading risk and taking up the mantra of diversification. The natural path, therefore, are the debt capital markets. LatAm corporates are responding in kind and the year to February 15 saw record bond issuance.
The retrenchment also enhances the role of domestic banks as sources of finance and has raised the profile of multilateral agencies such as the IDB in financing the ambitious infrastructure agenda of countries such as Colombia, buoyed last year by its achievement of investment grade, and across LatAm more generally.
While these European ripples, both negative and positive, confirm that LatAm remains considerably exposed to a deteriorating world economy, the region’s fundamentals and policy momentum are now protecting it against turbulence that in previous eras might have hammered it.
Unlike in past crises, now policymakers can use macroeconomic measures to limit their countries’ exposure to outside turbulence. They are also benefiting from a decade of stable politics that is in significant measure a response to the taming of inflation.
So while the eyesight of zealous policymakers south of the Rio Grande may have been strained from watching Europe’s drama with nervous anticipation, all the signs are that it is unlikely to give them too much of a headache.
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