Latin America and the Caribbean are already feeling the effects of the global financial crisis in terms of financing, the World Bank's (WB) chief economist for Latin America and the Caribbean, Augusto De la Torre, said in a release.
Credit contracts, a decline in export demand and a fall in commodity prices will result in trade deterioration, according to De la Torre.
This is likely to affect infrastructure projects, as issues such as cargo handling demand projections are beginning to be revised, while credits will be less abundant and more expensive to obtain, public and private sector officials from Brazil, Colombia, Chile and Uruguay told BNamericas earlier this month.
The region is better prepared to face a crisis than in the past due to its average 5% growth in the last five years and the implementation of a number of policies, but the unprecedented magnitude of the crisis will not leave the region unscathed, De la Torre said.
"Since our previous outlook for Latin America and the Caribbean in April 2008, the external environment has deteriorated significantly," he said.
"Three inter-related global shocks are hitting the world economy: the financial crisis, the slowdown in growth and changes in international relative prices (notably, a weakening of commodity prices). These shocks are becoming larger, increasingly reinforcing each other and spreading rapidly around the world, although their relative importance for different countries continues to evolve," he added.
The deterioration in risk premiums is occurring from a historically low level of spreads, high equity prices, appreciated currencies and record capital inflows. These effects, however, are less pronounced in Latin America than in other emerging regions, said De la Torre.
Foreign direct investment (FDI) inflows to the region have remained high according to the latest estimates, and local currency debt and interbank markets have remained relatively well behaved across most countries, De la Torre said.
Such has been the case in Colombia, where opportunities continue to attract FDI, national planning department (DNP) head Carolina Rentería told BNamericas.
Large infrastructure initiatives whose economic equation was well established are still attracting interest, while others are being pushed back or redesigned, according to international infrastructure sector officials.
A number of companies are focusing on projects they were already awarded and re-analyzing tenders in which they planned on taking part, said Brazilian construction firm Odebrecht's vice president for Latin America and Angola, Luiz Antonio Mameri.
THE EFFECT OF TRADE DECLINE
De la Torre said the likely stagnation of growth in the rich countries and sharp deceleration in emerging economies in Asia will adversely affect growth in Latin America and the Caribbean. The main indicator will be the decline in the world's demand for exports from the region.
This is already having an impact on port development projects in Brazil and Mexico, where the execution of a number of initiatives has been suspended, an official from an international organization told BNamericas.
The irregular effect of the crisis on the dollar value in Latin American and Caribbean countries has also affected trade, as some countries have noticeably lost competitiveness in only a few days, a Uruguayan exporter said.
The export of Uruguayan rice and rubber to Brazil halted for the last couple of weeks due to the effects of the crisis on exchange rates and the dollar value, the exporter added.
A similar issue could also affect Chilean exports, said an official from Chile's finance ministry, adding that it is now a priority for the region to work on adding value to what it produces.
Falling remittances (significant in Central America, the Caribbean and Mexico), weakening commodity prices, higher borrowing costs and the lag from the tight monetary policies that regional countries have pursued to curb inflation will exacerbate the situation, the WB report said.
"Economic growth in Latin America and the Caribbean is expected to slow from 5.6% in 2007 to an estimated 4.6% in 2008 and to 2.5-3.5% in 2009. Although the slowdown in the region will be greater than previously expected, the decline will occur from a relatively high growth trend achieved in recent years," the report added.
Countries with diversified trade will see a somewhat mitigated and delayed impact, given robust growth in China. The countries that are likely to perform better will be those that have in the past managed to reduce vulnerabilities, increase investment rates, diversify export markets and restore productivity growth.
In terms of commodity prices, De la Torre said they will deteriorate the terms of trade of the region as a whole, as Latin America is a net commodity exporter. According to the report, "over 90% of the region's GDP and population reside in net commodity exporting countries."
"This follows a prolonged period where the same countries benefited significantly from the commodity price boom. Meanwhile, approximately half the countries in the region, mainly located in Central America and the Caribbean, are net commodity importers. For them, the recent downturn in the international prices of fuels, industrial metals and cereals will provide some relief. Unfortunately, in many cases, this relief is offset by falling remittances inflows and stagnating economic growth. At the same time, the fall in international prices of food and fuels is helping reduce the inflation pressures to which they formerly contributed," the report said.
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