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South America as a whole has had unprecedented economic progress in recent decades

economic progressTaking a specific period to analyze markets, economic progress ,economies or countries is always risky. Yet, when trying to understand the recent evolution of Latin America, we feel that the last 20 years have been a crucial period as they represent the most radical change in the political, macro and social structures of Latin America in the last two centuries.

Throughout its history Latin America has been subject to economic fluctuations primarily linked to commodity prices (Figure 1). Only in the early 1990s did the region begin gradually to modernize its domestic economy, and services became an increasingly important engine for growth. Sounder macro policies, much-needed structural reforms, increased political stability, lower inflation (Figure 2), a growing middle class and higher commodity prices provided the stability and fuel that allowed for longer-term investment and a progressive increase in consumer spending.

These factors allow us to draw a demarcation between Latin America 20 years ago and where we are now. As a decade-long commodity price boom has come to an end, a repeat of a 1980s-style crisis in the region is perhaps one of the lingering fears in the back of investors’ minds. Some indicators already point to rising vulnerability.

The current account balance – one indicator of competitiveness – has turned to a deficit of more than 2% in 2013, and the outlook is not particularly favorable. Brazil’s current account deficit is at its highest level since 2001 and the IMF expects it to remain above 3% in the foreseeable future. Credit to the private sector has risen from 26% of GDP in 2002 to close to 50% of GDP in 2013. Healthier global growth should help allaysome of these fears, but even in a slower growth pattern we are quite optimistic about the outlook for Latin America. Why?

A number of indicators of financial vulnerability Brazil govt debt to GDP Mexico govt debt to GDP show that the region as a whole is in a much better position to absorb a serious shock. The aggregate gross debt-to-GDP ratio is stable, while the external debt-to-GDP ratio is 24.5%, just 4% 500% of exports of goods & services above its 30-year low – a level which is in line with Services the average level of emerging markets (24.7%).

External debt-to-exports is approximately 100%, just half its level in 1980, and not far from other emerging markets.

According to World Bank data, total reserves excluding gold stood at near 60% of external debt at the end of 2012, not far from the 40-year high of 62% recorded in 2011. The regional bank capital-to-assets ratio was 10.3% in 2012 – well above the OECD average of 7.4%.

The export sector is admittedly still dependent on commodities, especially in countries such as Venezuela, Peru and Chile, but on aggregate it is more diversified. The role of manufacturing has increased substantially, and it now accounts for a greater share of exports than commodities.

The direction of trade is also more diversified than it was in the 1980s, with emerging Asia having increased its share recently, while intra-regional trade is also high by historical comparison.

Nevertheless, the current level of intra-regional position to absorb a serious shock. The aggregate gross debt-to-GDP ratio is stable, while the external debt-to-GDP ratio is 24.5%, just 4% 500% of exports of goods & services   above its 30-year low – a level which is in line with the average level of emerging markets (24.7%).

External debt-to-exports is approximately 100%, just half its level in 1980, and not far from other emerging markets.

According to World Bank data, total reserves excluding gold stood at near 60% of external debt at the end of 2012, not far from the 40-year high of 62% recorded in 2011. The regional bank capital-to-assets ratio was 10.3% in 2012 – well above the OECD average of 7.4%.

The export sector is admittedly still dependent on commodities, especially in countries such as Venezuela, Peru and Chile, but on aggregate it is more diversified. The role of manufacturing has increased substantially, and it now accounts for a greater share of exports than commodities.

The direction of trade is also more diversified than it was in the 1980s, with emerging Asia having increased its share recently, while intra-regional trade is also high by historical comparison .

Nevertheless, the current level of intra-regional trade is still low relative to other integrated trading blocks (see Figure 8) and less than one third the level of the EU.

Importantly, inflation is under control, while private debt is relatively low when compared to that of more developed countries.

Finally, over the last three decades, several countries in the region have made strides in improving their institutional framework by transitioning to more democratic and inclusive institutions. According to Polity, over the last two decades there have been no autocratic regimes in Latin America. While 16 of the 19 countries tracked by the think tank are democracies, only three countries are not fully democratic. Among emerging market groups, Latin America has the highest share of democracies, a strong indication that the region has already made an important transition

Part of a Report done by Credit Suisse Private Banking

 

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