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Economy

Adios To The Latin American Fat Years

As oil and commodities prices drop and the U.S. dollar is revalued, Latin American economies must prepare for life with less hard cash.

In Buenos Aires.
In Buenos Aires.
Pedro Videla

-OpEd-

SANTIAGO — It's a difficult moment for Latin American economies. After a decade of growth, favorable conditions are disappearing and growth forecasts are no longer so bright. The International Monetary Fund (IMF)"s regional growth forecast for 2015 is just 0.9%, which, excepting 2009's great recession, is the lowest rate since 2002.

There are differences between countries, of course. Northern states with greater ties to the United States are benefiting from its economic recovery, while the southern economies are being hit by the slowdown of China's economy. For more than a decade, China fueled a rising demand for raw materials, increasing investments in and exports by countries supplying them. It was like manna falling straight onto Latin America.

But this wasn't the only positive external factor. The region had access to cheap and plentiful credit in dollars, thanks to the U.S. Federal Reserve's expansive monetary policies. The region's central banks didn't allow the abundance of dollars to raise the price of their currencies, and responded by accumulating reserve currencies and increasing the local currency supply. This abundance of liquidity meant access to cheaper credit for national companies and families, which meant more consumption and investment.

Good times gone

But now Latin America could face a dollar shock, or an increase in Fed interest rates that would end the long period of abundant liquidity that's been so beneficial to the region. If so, it would prompt a dangerous reversal of capital flows that would depreciate local currencies and make it more difficult for countries to pay external debts.

The forecasts for various regional countries depend to a great extent on external shocks. Mexico and most of the economies of Central America and the Caribbean, being tied to the U.S. economy, will benefit from its renewed dynamism. These economies will also benefit from the price declines of raw materials, especially oil. But for South America the new context is unfavorable because the region's ties with the United States are modest and because China's slowing economy will impact demand for commodities. Countries most directly dependent on Chinese demand are Chile, Brazil, Peru and Uruguay, which send between 15% and 25% of their exports to the Asian superpower.

The price of crude oil also began to fall dramatically in mid-2014, primarily because of excess supply. The economies most affected by that were Venezuela, Bolivia, Ecuador and Colombia, which have seen a worsening of their trading terms and comparative prices of imports and exports.

Brazil, the region's biggest economy and the world's seventh, is also troubled. Its GDP is expected to fall 1% this year, thanks to external stresses and political instability at home exacerbated by the Petrobas corruption scandals. Add to this the social, political and economic chaos of Argentina, and we can expect South America's three primary economies (Brazil, Argentina and Venezuela) to shrink this year. On a positive note, Colombia, Chile and Peru have more room to maneuver with their economic policies in response to negative outside conditions.

Authorities across Latin America should closely watch the risks in their financial sectors. After years of expanding credit, abundant capital and borrowing by companies on international markets, the early readjustment of U.S. monetary policy and a recovering dollar will put pressure on anyone with uncovered dollar debts or obligations of one form or another. Central banks must ensure that inflation remains within set objectives and intervene if needed to contain excessive volatility in exchange rates.

In this context, it would not seem advisable to try and counter worsening external conditions with macroeconomic stimuli at home. To establish solid bases for growth, states must focus on resolving structural weaknesses: improve institutions and education, assure equal opportunities and nurture the business environment.

Many Latin American states have improved their macroeconomic management and stabilized their economies, but very few have made decisive progress with structural reforms. Which is why Latin America grows whenever manna falls from heaven but remains the region with the most volatile GDP growth rates. They should gird themselves because, for now, the manna has gone.

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FOCUS: Russia-Ukraine War

Along The "New Border" Of Ukraine, Annexation Has Just Doubled The Danger

Vladimir Putin announced the annexation of Ukrainian territories in a ceremony in the Kremlin. In a village just a few kilometers away from what is now the Ukraine-Russia "border" in Putin's eyes, life continues amid constant shelling and the fear of what comes next.

Ukrainian soldiers are stationed in the village of Inhulka, near Kherson.

Stefan Schocher

INHULKA — The trail leads over a gravel road, a rickety pontoon bridge past a checkpoint. Here in the remote village of Inhulka near Kherson in southern Ukraine, soldiers sit in front of the village shop. Inside, two women run back and forth behind the counter, making coffee, selling sausages, weighing tomatoes. "Natalochka, where are the cookies," calls a dark-haired lady across the room.

But Natalochka, her colleague, is about to lose her nerve. "What kind of life is that?" she says, finally reaching up to grab the cookies from the top of a shelf. What kind of life can it be, she asks, when something is constantly exploding next to you and you don't know if you'll wake up in the morning.

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Inhulka is the center of a rural community. 1,587 inhabitants, as the village chief says, one school, one kindergarten, one doctor, two stores. Since March, nothing here is as it used to be. That was when the Russian army came to the village.

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