Latin America] A look at the crisis in the region - How are the neighbours doing?(1)

After more than 32 years devoted to the study of Latin America, I would be the first to insist that each country that comprises it is different, though there are at the same time common threads to consider.

In the context of the current crisis, a number of effects are affecting most of the region, though in different proportions according to specific situations. First and foremost is the fall in energy prices. The region has major exporters of both oil and gas (Argentina, Bolivia, Colombia, Ecuador, Mexico, Venezuela), some "around self-sufficiency levels" (Brazil, Peru) and a few importers (Chile, Paraguay, Uruguay). On balance, the fall in prices is bad news, not least because it was so sudden and so unexpected, coming soon after a boom period which looked unstoppable to many. 

Jointly with energy, commodity prices, both metal (such as copper) and agricultural (from cellulose to cereals), have also reverted their boom, adding other sectors to the crisis zone. 

For those countries with a large emigrant community abroad (Mexico, Bolivia, Colombia, Ecuador, Paraguay and Peru in particular), the reduction in remittances and the reversing of the safety valve of finding jobs abroad is very unwelcome news. Some of it is intra-regional, such as Bolivian, Paraguayan and Peruvian workers in Argentina and Chile. 

Though more domestic and neighbourhood visitors have helped in the short-term, the sharp fall in the upper-end of the long-range visitors from North America, Asia and Europe has not only hit a niche of recent vintage, but also the most profitable market niche in the sector. 

Latin American currencies in general have also reversed the upward trend they had previously shown against the U$. Though this phenomenon has also hit the Euro and the Pound, it was considered serious enough in some countries to merit intervention, at least to smoothen the fall. In Chile, they like to do things differently and load the dice whilst praising the "free market". Since its through of late October 2008, the peso has risen back some 15 % against the U$. 

The authorities have preferred to favour the highly indebted private sector's foreign debt, and use the exchange rate as a futile anti-inflation weapon, rather than give a respite to two sectors which had just started to reap the benefits of a weaker peso: agricultural exporters and tourism, both of which are major employers. 

There is also in some quarters a "whistling in the dark" attitude to the crisis. You hear stories such as the squeezed wine-drinking middle classes of Europe will switch from Chateau Margaux to Chateau Rancagua, thus boosting wine exports (have they considered the possibility that they might switch to drinking less wine, or none at all, as in any case the alcohol taxation system in many importing countries ends up causing a minimum difference between similar quality wines from different countries at the retail level?). Another optimistic (in fact asinine) theory I heard this morning, expects a phenomenon they call "near-sourcing", where international manufacturers are going to switch manufacturing from faraway China and Korea to Latin America. If they did not do that when shipping rates were sky-high, why would they do it now? Why replace the diligent, experienced and disciplined Asian worker with a bunch of lazy sods with an attitude problem, managed by executives that are no much better. Just imagine the cost of the new investment, at a time of strapped cash flow. 

Last but by no means least, and contrary to the trend in the industrialised world, the cost of domestic borrowing (not to mention the difficulty) has risen throughout the region. Most borrowing rates, be they corporate or personal, have as much bearing on the Central Bank's Lombard rate as Hamas is friendly with Golda Meir's grandchildren. Economists and journalists of the world please put that into your little minds: there is no such thing as monetary policy in Latin America. You cannot have a 7 % Lombard rate and a 150 % store credit card rate, and pretend that there is any cause to effect between them. 

• ARGENTINA  

Argentina had problems before the crisis, and the latter has not helped. One major problem is "Kirchner fatigue", and in particular Madame Kirchner (a medal of courage to the first politically incorrect political science thesis, on the effect of menopause on female leaders). Her erratic way of running things, total disregard for schedules (even by Hispanic standards), the ongoing row with her vice-president, who is now flirting with the opposition, are not the sort of combination you want to face a crisis. There are rumours that she suffers from clinical depression (I thought that made you stay in bed crying, rather than shoot your mouth off in Cuba). 

The other problems, which are partly link, are inflation transparency and fiscal accounts. The publication of the 0.5 % official price index for January has once again raised the controversy, as real inflation is estimated to be running at triple the official rate. The fact that wages went up by 22.4 % on average last year is closer to reality. This in turn affects all other inflation-adjusted statistics from GDP to retail sales etc.. 

If the rate becomes more transparent, it will cause deterioration in public finances, with a good chunk of public debt being indexed. Fiscal revenue rose by only 11 % in January, with VAT income stagnant and a 26.7 % in export taxes. Lower commodity prices and a terrible drought have affected the fundamental rural sector. Industry is not doing much better with car production in January plunging by 54.6 % and exports by 60 %, whereas domestic new registrations were 31.8 % down. A new plan of subsidised exchange of some type of home appliances has only resulted so far in a shortage of the said goods, as demand artificially surged. Utility rates are at last undergoing major increases, but it is inflationary. 

The authorities claim that 2009 debt service obligations are "covered". Still, U$ 29.10 bn left the country in 2008, 160 % more than the previous year. Squeezed state finances would mean less margin of manoeuvre on social programmes, essential to keep the lid on social pressure. A potentially delicate situation.