At the same time, the region will be put to the test because of a possible deterioration in the external environment. Wharton management professor Mauro Guillén, head of the school's Lauder Institute, believes that "the impact [of the current crisis] will be small." Nevertheless, he warns that if there is a recession, "Mexico and Central America will suffer a great deal." Tuesta also stresses the important role that conditions in the U.S. will play in Latin America, although he notes that the region generally depends a lot less on demand from the U.S. than it did in the past.
Experts agree that it would be more troublesome if raw material prices dropped precipitously, but they predict that this won't happen unless there is a more abrupt decline in global growth. In addition, there is a negative side to high raw material prices. Although rising prices "favor growth in the region, they also generate excessive liquidity and increase expectations about inflation," notes Rafael Pampillón, a professor of economics and analysis at Spain's Instituto de Empresa. "The CPI [Consumer Price Index] can be quite upsetting for the economies of the region and it can force central banks to opt for higher interest rates. That, in turn, would put a brake on economic growth," he says.
Continued high prices for petroleum, which reached the $100 per barrel mark at the start of 2008, will also increase inflationary pressures, according to Anita Kon, professor at the Catholic Pontifical University of São Paulo (PUC/SP) in Brazil. One saving grace, she notes, is that "since Brazil is self-sufficient in petroleum production, its import requirements are declining. In addition, the upward revaluation of the country's currency [the real] against the dollar promotes [Brazilian] imports." In 2008, the government of Brazil plans to begin exploring for oil in new basins, with an eye toward increasing the country's reserves.
Moreover, Kon says, Brazilian companies are very aware of what can happen as a result of a decline in the availability of global credit. "These financial blockades tend to have repercussions on the country's growth rate, on its financial markets and on infrastructure investments." She predicts that the repercussions will be significant and negative in 2008 "because Brazil is taking in a growing volume of foreign direct investment in order to stimulate more growth, which is necessary because internal savings are scarce."
Another historic factor is political risk. The growing populism in the region is being watched closely by foreign investors and, according to Pampillón, presents a serious danger that populist governments in Venezuela and Ecuador "will proceed with excessive public spending programs and attempt to control prices and markets."
Spain's Housing Slowdown
Spain, on the other side of the Atlantic, shares its culture and language with Latin America. It also maintains close economic relationships with the region. In 2008, Spain's growth rate is expected to slow to about 3%, compared with 3.8% in 2007. Yet Altina Sebastián González, a professor of finance at the Complutense University in Madrid, believes that the current situation is "a storm but not a hurricane. While the percentage of bad loans in the U.S. has shot up, the situation appears to be under control in Europe. Credit differentials have increased, but not insolvencies." Sergio R. Torassa, a professor of finance at ESCI-Pompeu Fabra University, predicts that "corporate profits will continue on their same course, with an estimated growth rate of 10% in 2008. Spanish banking is enjoying strong solvency ratios; there are practically no bad loans, and the banking sector is highly efficient. Perhaps the only weakness is its dependence on foreign financing, which is becoming scarcer and more and more expensive day by day."
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