RemittancesGateway.org

Latin America Frets While Spain Burns

Tuesday, 04 May 2010 16:32

Source: Wall Street Journal
By MATTHEW MOFFETT & PAULO PRADA

For Latin America, whose economic volatility triggered countless international crises over the years, the financial mess in Spain heralds a role reversal. These days, it is the relatively robust economies of Latin America which are fretting about contagion from the sickly Old World.

Just as Latin America was gearing up for solid region-wide expansion of 4% this year, caution flags are rising amid the pessimistic outlook for Spain, second to the U.S. as a source of foreign investment and emigrant remittances in the region.

On Wednesday, Standard & Poor's Ratings Services cut Spain's debt rating by one notch, citing its poor prospects for recovery from the downturn caused by the bursting of a huge property bubble. On Friday, Spain's National Statistics Institute said the country's unemployment rate breached 20% in the first quarter, as the economy continued to shed jobs after the construction boom's collapse. Spain's investments in a growing Latin America may be one of the few things the country has going for it these days.

Economists say that many Latin economies with heavy Spanish investments—such as Brazil, Chile and Colombia—are well-positioned to endure any shockwaves because they have sensible budgets, good growth prospects and comfortable levels of foreign reserves.

In addition, Spain's economic importance in the region, which peaked when big Spanish corporations snapped up billions of dollars of Latin assets during the privatization boom in the 1990s, has been increasingly eclipsed by the growing role of China, which is buying up massive amounts of Latin American natural resource exports.

"The era of the privatizations involving Spanish capital has faded…and we're much more focused these days on China and commodities," says economist Cristian Gardeweg, of Celfin Capital in Santiago, Chile.

That's why many economists are relatively sanguine. "Most of the bigger economies in the region now have the tools to withstand these shocks and if they've made it this far through the global downturn, they are unlikely to collapse now," said Alejandro Neut, an economist at the Paris-based Organization for Economic Cooperation and Development.

But Latin America could be squeezed if the Spanish crisis deepens and global investors go conservative. Many Latin economists are keeping a close eye on the health of big Spanish banks such as Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, which have a major retail presence in a host of Latin American markets. In addition, countries like Ecuador, Peru and Colombia have felt the reduction in remittances sent by migrant laborers in Spain. Over the past two years, total remittances from Spain have fallen around 15% to €7.1 billion ($9.4 billion) in 2009, according to Spain's central bank.

Certainly the economic tables have turned between Latin America and the mother country. In the early 1990s, recently democratized Latin American countries were stumbling out of a debt-induced slump and seeking to emulate Spain's emergence as a vibrant economy after decades of isolation during the Franco dictatorship. Latin governments divested tens of billions of dollars in state assets, and welcomed Spanish buyers such as telecommunications giant Telefonica SA, oil and gas company Repsol YPF, and electric utility Iberdrola SA. Some Latin Americans joked about "the return of the Conquistadors."

Spain found investing in the New World was a roller coaster ride. Financial markets in Madrid reeled after the meltdown of Mexico's overvalued peso in 1995 and Argentina's dollar-pegged currency in 2001-2002.

But Latin American policymakers learned some lessons over the past decade, and that is why the region has weathered the global financial crisis in much better shape than Spain. When the global financial jolt struck in late 2008, major Latin American economies had large caches of dollar reserves, relatively low debt levels, and floating currencies that gave them flexibility to withstand the blow. The leftist government in Brazil, the region's largest economy, has won over financial markets with a disciplined fiscal and debt-management policy that allowed the country to become a net creditor nation in 2008.

By contrast, Spain is freighted with a heavy debt and a budget deficit of around 11% of GDP—nearly four times that permitted by the European Union. Moreover, since Spain is part of the euro zone, it doesn't have flexibility to devalue its currency to spark exports.

Ironically, the Spanish investments in relatively vibrant Latin America, some €128 billion between 1993 and 2009, could turn out to be a saving grace for Spain, says Pablo Toral, a Beloit College political scientist who has written extensively on Spain's economic role in Latin America. The investments "have been hugely successful, one of the best economic decisions Spain made in the past 15 years," according to Mr. Toral.

Iberdrola, the Spanish utility, was able to offset falling power demand and prices in Spain with booming electricity demand in Brazil, where the company operates several hydroelectric power plants and is one of the biggest electricity distributors. Chairman Ignacio Galan said in an interview Wednesday that the company has been "penalized to a lesser extent" by markets due to its diversification strategy.

Repsol, which for a long time has suffered from fuel-price controls and falling oil output in Argentina, is now benefitting from its significant Latin American exposure. It has been planning to sell a stake in Argentine unit YPF to either institutional investors or in a stock offering. Chairman Antonio Brufau said Thursday he expects a deal on YPF in coming months.

On Thursday, Santander posted better-than-expected first quarter results, partly because ballooning profits in Brazil helped offset the turmoil rocking its domestic business. "These are by now consolidated and profitable positions that can play a very strategic role for companies now suffering in Europe," said Alessandro Rebucci, senior research economist at the Inter-American Development Bank. "Good results in Latin America can help them stay afloat at home."