Latin America witnessed a strong recovery while Europe’s debt crisis truly began to unravel last year, and the U.S. struggled with its recovery and debt woes.Capital flows to the region surged as investors sought out safer markets with a faster recovery. But Latin American stocks have been smacked since late July, on global concerns.
What happened to Brazil?
For a while Brazil was catching up with China and India. With money flowing in ahead of the Olympics and the World Cup its economy was growing at a staggering pace.
More recently though, the economy has started slowing down. Defaults on personal loans have been on the rise, and manufacturing has been nearly flat for a year as the sector struggles with a strong Brazilian real. The soaring currency has made it less competitive and the country has a high current account deficit.
Investors have moved away from the stock market because the worry about the impact that commodity prices could have on the country’s material producers. They are also worried about inflation which has been spreading to the core. In fact, the Bovespa entered a bear phase on July 27 from its peak in November last year.
Here’s a chart the compares Bovespa’s performance to Nasdaq and the Dow over a year:
Latin America starts to look squeamish
The World Bank’s chief economist for Latin America and the Caribbean, Augusto de la Torre warned (via The Economist):
The region “is hitting the speed limit after a very vigorous recovery… Latin American economies don’t have a BMW engine, they have a Lada engine, and they overheat very quickly.”
This is largely because the countries don’t save or invest enough and rely too much on their central banks instead of reforming their fiscal policies. Given the pace of their economic recoveries, Latin American countries could have invested more of their GDP. Chile which posted 6.8% GDP growth in the second quarter, is reported to have done the most raising its tax revenues.
Worrying signs in Chile
In a new report however, Société Générale analyst Alejandro Cuadrado warns about Latin America’s fourth largest economy. After inflation met the central bank target, Banco Central de Chile is widely expected to hold interest rates at 5.25%, but Cuadrado expects headline numbers to spike at the end of the year.
Meanwhile, in a bid to keep investors calm and better brace itself against global shocks, Chile announced plans to further integrate its market with Colombia’s. The Chilean and Colombian Presidents have now told their finance ministers to integrate financial services in an existing free-trade agreement between the two countries.