While much has been written about the fact that Latin America’s rapidly growing economies are largely immune to US financial woes, President Obama’s deal with Congress to avoid a US debt default will have a negative impact throughout the region.
Granted, the consequences would have been much worse if the US government had failed to reach an agreement — even a bad one, as the one it reached — and the United States had lost its AAA credit rating.
Still, the US debt agreement, scheduled to cut the US budget deficit by at least $2.1 trillion over the next 10 years and allow a 12-member commission decide on additional deficit reduction measures by Nov. 23, is likely to slow down the already timid US economic recovery, and affect all countries in the region to some degree.
Osvaldo Kacef, head of the Santiago, Chile-based United Nations Economic Commission for Latin America and the Caribbean (ECLAC) economic development area, told me that the US debt agreement will hurt Latin America in the short run, because the expected US economic slowdown will reduce US imports and reduce the flow of US tourists to the region.
“The most immediate impact will be felt in those countries that have the most intense trade with the United States, such as Mexico and Central America,” Kacef said. “Caribbean countries that depend heavily on US tourism will also be affected.”
South America’s commodity exporters, including oil-rich Venezuela and Ecuador, metal exporters such as Chile and Peru, and agricultural exporters such as Brazil and Argentina, will be hurt indirectly. The expected US slowdown will affect China, the biggest buyer of their goods, he explained.
Eduardo Borensztein, a South America economist analyst with the Washington-based Inter-American Development Bank, agrees that a US economic slowdown will hurt Latin America, but cautioned that it shouldn’t be an alarming trend.
“Latin American economies will grow at a slower rate, but it won’t be catastrophic,” he said. “It will be uneven impact: It will affect Mexico and Central America more than South America.”
Other economists fear that US congressional budget cutters will sooner or later get their hands on US foreign aid, hurting small Central American and Caribbean countries that rely on US assistance.
Among the most optimist economists I talked to was Alberto Bernal, from Bulltick. He says not even a slowdown in the US economic recovery would affect South America’s commodity exporters, as long as it’s just that, and not a new US recession.
“If US growth slows down from the 2.5 per cent to 1.7 per cent this year, as we expect, it will have a minimal impact on Latin America’s economic growth, with the exception of Mexico,” Bernal said. “But if there is a US recession, it would be a different story.”
Before this week’s US debt accord, most economists had projected an average economic growth of 4.5 per cent for Latin America this year, including 7 per cent growth for Argentina and Uruguay, 6.7 per cent for Chile and Peru, 6 per cent for Colombia, 4.5 per cent for Brazil and Mexico, and 1 per cent for Venezuela.
At the time of this writing Wednesday evening, no international financial institution had adjusted growth projections for the region.
My opinion: In the medium term, I’m reasonably optimistic about the US prospects. Unlike in Europe, there is a certain social consensus in America that the country needs to tighten its belt. While in several European countries people take to the streets to protest against budget cuts, in the United States the loudest protesters are those who want bigger budget cuts.
Also, compared with China, there is a relative transparency that will keep the dollar as the world currency of last resort for the foreseeable future. And I’m mildly hopeful that economists are right when they say that there is a 70 per cent chance that the coming US economic slowdown will be just that, and not a new recession.
But in the short run, I’m afraid that the US debt deal, coupled with Europe’s financial chaos, will cut the wings of the US economic recovery. At the insistence of Tea Party fundamentalists, the US budget deal cuts too much too soon, rather than spreading the pain over a longer period.
Unless Obama wins the next round and gets some tax increases that could keep the recovery afloat, it will hurt the US recovery, and Latin America as well.
© The Miami Herald, 2011. Distributed by Knight Ridder/Tribune Media Services.
