The decline and fall of General Motors holds a certain grotesque fascination for onlookers. It posted $1.1 billion in first quarter losses and a credit rating downgrade to junk status looks inevitable. The decay of GM has two implications for Latin America.
The first is its impact on the high yield bond market. Most Latin American debt has a junk rating. Trouble in the high yield market will impact the market for Latin American bonds too. Investors will expect higher yields. The spread of Latin American bonds over US Treasuries has already risen above 400 basis points. A higher Fed Funds rate will keep the pressure on emerging market debt.
The second impact is the threat of what one New York investment banker calls the “disintermediation of Latin America.” GM can’t make cars profitably because it can’t compete with Asia. A decade ago, Latin America would be the principal beneficiary from the decline of American industry as rust belt factories moved south. But now, it is more likely that China will occupy the vacuum left by American industry. In the future, Latin America could be little more than a commodity exporter.
Both threats are manageable. Governments have strengthened their capital structures so the impact of a downturn in the bond market should be bearable. The demise of GM was largely expected and investors positioned themselves accordingly. The danger of industrial disintermediation is more serious. Governments need to spend more in education and infrastructure and throw open their economies to free trade. Companies need to invest more. Most Latin American countries have already set off down this path. But instead of walking they have to sprint.