Latin America Economic Boom Threatened as Credit Freeze Deepens

By Joshua Goodman and Sebastian Boyd

Oct. 2 (Bloomberg) -- Latin America's fastest economic expansion in 30 years may be coming to an end as the global credit crunch stunts investment and squeezes demand for the region's commodities.

``We're in a serious economic crisis,'' Colombian Vice President Francisco Santos said in an interview in his Bogota office. ``Financing is going to get scarcer and scarcer, and that means that investment is going to be difficult to attract.''

The region's growth in 2009 may be cut to less than 3.3 percent, from 4.6 percent this year, according to economists at Barclays Capital. The slowdown will make it harder to further reduce poverty that's fallen to its lowest levels since before the ``Lost Decade'' of the 1980s in which countries borrowed more than they could repay.

The crisis will test Latin America's decade-old commitment to debt reduction and open markets. Mexico this week shelved plans to privatize an airport, citing the U.S. crisis, while Costa Rican President Oscar Arias warned the country's growth rate may halve as investment drops. In Brazil, lending that has powered the country's fastest expansion in more than a decade is drying up, said Ricardo Espirito Santo, head of the Brazilian unit of Portugal's Banco Espirito Santo SA.

``The last four or five years were very good for Latin America, but that cycle is coming to an end,'' said Rodrigo Valdes, chief Latin America economist at Barclays Capital in New York. ``We expect a deceleration in practically all economies.''

Cutting Forecasts

Brazilian economists lowered 2009 growth projections to 3.6 percent on Sept. 26, from 4 percent two months earlier, according to a central bank survey. JPMorgan Chase & Co. cut its forecast for Latin America's largest economy to 3.2 percent from 3.8 percent.

Mexico, the second-biggest economy, may expand 2.5 percent next year, according to the average estimate of 33 economists surveyed by the central bank, which released its report yesterday. They had previously forecast 3 percent.

The region has posted average growth of 5.5 percent a year during the past five years, a pace not seen since 1970 to 1974, according to International Monetary Fund statistics.

Latin America may also see a drop in remittances from emigrants living in the U.S. Money transfers from Mexicans living outside the country dropped a record 12.2 percent in August, the central bank said yesterday. Remittances accounted for almost 3 percent of Mexico's gross domestic product last year.

``Mexico is very tied to the U.S., and they're going to get hammered,'' said Mark Weisbrot, co-director of the Washington- based Center for Economic and Policy Research.

Plane Purchases Suffer

Empresa Brasileira de Aeronautica SA, the world's fourth- largest aircraft maker, said last week that tightening credit markets are making plane purchases difficult for some buyers.

Brazil's Localiza Rent a Car SA, the region's biggest car- rental company, delayed this week a 300 million real ($157.6 million) bond sale because of ``adverse market conditions.''

Central banks are injecting liquidity as foreign credit lines dry up. Chile's central bank canceled planned purchases of dollars and opened up a $500 million foreign currency swap window as the cost of borrowing dollars climbed.

``Local banks had counterparties overseas who provide them with dollars, but those banks have failed, been bought or tightened credit,'' said Ricardo Gomez, head of fixed-income sales and trading at Larrain Vial SA in Santiago.

Commodity Rout

Prices for commodities such as soy, gold, copper and oil, which helped fund the region's boom, have fallen 28 percent since their July 2 high, according to the RJ/CRB Commodity Price Index. Should prices return to their 10-year average, Latin America's balanced budgets would quickly revert to a deficit of 4.1 percent of gross domestic product, Morgan Stanley said in a Sept. 29 report.

Venezuelan President Hugo Chavez, who has relied on oil to fund his ``21st-century socialism,'' said the U.S. crisis will hit the region with the force of a ``hundred hurricanes'' and that ``no country can say it won't be affected.''

Venezuela is the country most vulnerable to a commodity slowdown, having seen its terms of trade, a measure of export earnings, more than double since 2001, according to a study by Brazil's national development bank. Brazil and Mexico's trading terms improved less than the 22 percent regional average, according to the same study based on United Nations data.

``The big question for Latin America is how long and deep is this cyclical downturn going to be, and how much is it going to reduce commodity prices,'' said Nicholas Field, who helps oversee about $18 billion in emerging-market equities at London- based Schroders Plc.

Building Reserves

Analysts including Paulo Leme, chief Latin American economist at Goldman Sachs Group, Inc. say the slowdown may be milder than in previous crises. Many regional governments have used revenue from the commodity boom to pay down debt and build reserves.

The eight largest South American economies shrank their debt as a proportion of gross domestic product from 2001 to 2008, according to Merrill Lynch research. Merrill expects growth to slow to 3.4 percent next year from 4.6 percent in 2008.

``It was a good ride,'' said Gray Newman, chief Latin American economist at Morgan Stanley in New York. ``But the era of abundance is over.''

To contact the reporters on this story: Joshua Goodman in Rio De Janeiro at jgoodman19@bloomberg.net; Sebastian Boyd in Santiago at sboyd9@bloomberg.net