Brazil, Peru, Chile less slowdown prone

Thu Apr 3, 2008 2:34pm EDT
By Herbert Lash
NEW YORK (Reuters) - Brazil, Peru and Chile, while exposed to swings in commodity prices, are best able in Latin America to withstand a U.S. slowdown because of flexible policies, a Merrill Lynch & Co economist said on Thursday.
A sharp drop in commodity prices would slow Latin American growth; but Asian demand is still booming and unlike the past, emerging markets are now less dependent on the U.S. economy, said Felipe Illanes, Merrill's chief Latin American economist.
"The three countries that come out on top in their ability to address their vulnerability to a slowdown are Brazil, Chile and Peru," Illanes told the Reuters Latin America Investment Summit in New York.
"A lot of people are coming to the realization that this group of countries are probably the strongest," he said.
Among the main regional economies Illanes examined regarding vulnerability, Mexico came next and then Colombia, Argentina and Venezuela. Doubts about the reliability of Argentine inflation figures put it second to last.
Flexible exchange rates, prudent government spending and the paydown of U.S.-denominated debt have made many Latin American economies, with the main exception of Venezuela, more resilient to a U.S. recession than in the past, Illanes said.
Merrill Lynch expects commodity prices to remain buoyant because of supply constraints; and demand from a big consumption driver, China's work force, won't wane anytime soon.
"You have demand from Asia still booming, as again that cycle is on a cyclical upturn and unlikely to run out until you run out of the main input, labor. And China certainly is nowhere near that situation at present," Illanes said.
In essence, Merrill believes that the decoupling thesis, which holds that emerging markets can grow without the United States driving world growth, is valid because of Asia.
In addition, the global credit crunch has its origins in the United States this time around and not in the emerging markets, where past economic disruptions have occurred.
"The reason why we think decoupling holds is because of what emerging markets will be doing this time around. We have Asia in particular growing very strongly on the back of a cyclical upturn," Illanes said.
Contrary to popular notions, Argentina and Brazil are the least exposed to swings in commodity prices, he said. Using as a base export prices at the end of 2005, Merrill found that the windfall from the boom in commodity prices amounted to less than 2 percent growth in gross domestic product for the two countries.
One reason that Brazil is seen as a commodity play lies in the weight oil company Petrobras (PETR4.SA: Quote, Profile, Research) and miner Vale do Rio Doce (VALE5.SA: Quote, Profile, Research) have in the Bovespa index, the main Brazilian stock index, Illanes said. It's not a good economic indicator, he said.
"When people think about commodity risk and Brazil, they're correct in focusing on commodities, but not because of the true economic effects, but rather because of the effect on the Bovespa," he said.
While Argentina has had a relatively smaller windfall from rising grain prices, the country has leveraged that windfall to boost public spending through a tax on soybean exports, he said. A sudden price drop could squeeze public spending.
In contrast is Chile, which has neutralized strong gains in metal exports by keeping earnings abroad in a sort of rainy day fund, he said. If exports, which account for about 15 percent of Chilean GDP, fell, the government could draw down the fund.
Mexico, meanwhile, might not suffer as much as expected from slower U.S. growth because of the linkage among U.S. and Mexican manufacturing. Oil has been low-balled at $49 a barrel in the government's budget this year, and Mexico appears ready to quickly push any windfall into public spending, he said.
An oil windfall might boost growth by half a percentage point, Illanes said.
Merrill economists believe a U.S. recession began at the start of the year, and the U.S. economy will grow just 0.8 percent in 2008. Region-wide growth in Latin America is expected to slow to 4.5 percent from 5.5 percent in 2007, Merrill estimates.
(Reporting by Herbert Lash, editing by Gerald E. McCormick)