A falling greenback is a godsend to nations like Argentina, Colombia and Uruguay, where over half the foreign debt is still set in dollars or else tethered to interest rates that closely track the greenback.
Latin America: Shedding Bad Habits
The falling dollar should have the region in a funk. But trade flows remain strong, and a weak greenback cheapens debt.
Nov. 29 issue - For Latin Americans, the dollar has always been a mixed blessing. When the greenback is cheap, consumers splurge on imported goodies and take their holidays in Paris or Disney World—even as the region's trade balances go south. By rights, exporters ought to be in a funk—not least because the United States is their best customer. But that's not the case. In fact, exports are surging from Montevideo to Mexico City, buoyed by a resilient world economy and handsome prices for commodities like coffee, iron ore, oil and copper. Brazil is expecting a record $33 billion trade surplus for 2004, while one of every $10 generated in Argentina this year will come from exports.
The favorable trade winds are driving a hemispheric recovery that will see the 34 nations of the Caribbean and Latin America expand by 4.7 percent this year, according to the World Bank. What's more, in a region where prices are often tagged to the dollar, stronger local currencies will help staunch inflation. "No one can complain that the weaker dollar has made them uncompetitive," says Ricardo Amorim, Latin America analyst for the German bank WestLB. "What might otherwise be a problem has turned into an opportunity." Easy money has long been Latin America's fatal attraction. During the 1990s, the region's businesses welcomed a tide of dollars, euros and yen that sloshed around the globe. And often, governments propped up their currencies through unrealistic exchange rates. Along came the international financial contagion, and investors fled from developing countries in droves. One by one enfeebled Latin economies buckled and were forced to devalue their currencies. Painful as they were, the devaluations made the region's exports more competitive. However, the debt burden spiked overnight as nations found they needed to make three or four more reais, escudos, bolivares and pesos to pay back every dollar they owed. Only lavish bailouts from international lenders rescued Brazil and Mexico from collapse.
With the region on the rebound, fortunes are beginning to turn. Flush with export revenues, Latin governments and businesses are taking advantage of the weaker dollar to pay off their foreign loans. A falling greenback is a godsend to nations like Argentina, Colombia and Uruguay, where over half the foreign debt is still set in dollars or else tethered to interest rates that closely track the greenback. (It's not such a boon for Brazil: two years ago 40 percent of Brazil's then $250 billion foreign debt was tied to the dollar. Now, only 12 percent is, while total foreign debt has fallen to $212 billion.)
Such exposure could still spell danger in a volatile world economy. Experts say that a collapsing dollar could send shock waves through emerging markets, and perhaps prove disastrous in Latin America. "A sharper fall of the dollar could unbalance the region in a serious way," says Amorim. "That could force the U.S. to raise interest rates faster as investors shift to Europe, and severely reduce capital flows to Latin America."
The good news is that the region's economies may be in better shape than ever to deal with a downturn. Latin America's hard-currency debt, though steep, is not increasing, despite the allure of cheap international lending rates and a new group of left-leaning governments who would seem inclined to big spending. "Latin America finally seems to be shedding its worst habit," says Alberto Bernal, an emerging market specialist for IdeaGlobal, a New York-based consultancy. "You don't have to crash to learn." That augurs well for nations where dollars have always been spent more than saved.
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