With the exception of Mexico, Central America and the Caribbean, most Latin American countries are heavy commodity exporters. As such, the strong decline in commodity prices in recent months and the expectation that most commodity prices will remain substantially below 2008 peaks this year imply that the outlook for GDP growth and the fiscal and external accounts has worsened considerably in the region. At the same time, the global de-leveraging process is likely to hit all countries to a certain degree as current account deficits deteriorate and private capital inflows dwindle, necessitating an economic adjustment. Finally, the impact of the global recession will be felt through trade, financial, overseas workers' remittances and FDI channels.
"While domestic demand growth will cushion faltering external demand to some extent, Fitch expects consumption and investment to be hit by the global downturn, falling domestic confidence, rising unemployment and declining commodity prices," said Senior Director Shelly Shetty. As a result, Fitch projects Latin America's real GDP to contract by 0.9% in 2009, with Brazil's economy stagnating and Mexico contracting by over 2%. "While the scope of further monetary easing exists, credible counter-cyclical fiscal policies can be employed in only a few countries, making it challenging for Latin American authorities to lessen the blow of external shocks on their economies."
However, Latin America's starting point is perhaps the best in recent decades, with five years of current account surpluses and rapid capital inflows leading to a substantial increase in the region's external buffers. Many Latin American sovereigns have strengthened policy frameworks by adopting inflation-targeting regimes and implementing flexible exchange rates. Moreover, the absence of significant financial dollarization in most countries has given central banks substantial leeway to let their currencies depreciate in order to adjust in the face of external shocks.
After three positive rating actions in early 2008, the credit cycle has turned in Latin America, as evidenced by Fitch taking a number of negative rating actions since September of last year. Furthermore, Fitch's Negative Outlooks on Mexico, El Salvador and Jamaica suggests that credit pressures are on the rise in the region. The main risks for Latin America's credit outlook continue to be: a sharp and prolonged global recession, a continued decline in commodity prices, sustained closure and/or renewed instability of international financial markets and a rise in political and social instability in the region due to worsening growth and rising unemployment. "The risk of a prolonged Latin American economic downturn could increase the potential for policy slippage in the region," said Shetty.
