Challenges Ahead for LatAm (1)

LatAm appears to be in for a rougher 2008 than Asia or EEMEA, according to research from Merrill Lynch. “While our base case is one of decoupling from the US slowdown, we think that 2008 will be a more challenging year for Latin America,” says the shop. “The main challenges will stem from both a less favorable external environment and from inflation constraining policy domestically,” it adds. Risks include a slower US economy, potentially tighter credit conditions and softer commodity prices. “A further, albeit evolving, aspect here is how the effects of the weakening USD will play out in terms of global risk appetite and across the region’s competitiveness,” says Merrill. On the ground, LatAm is dogged by inflation, which limits expansionary fiscal policy and/or monetary easing. However, decoupling stands the region in good stead. “As domestic demand picks up and consolidates through stronger and deeper financial markets, the LatAm and US business cycles should remain less correlated than in the past. Also stronger public and corporate balance sheets make LatAm less dependent on foreign savings and, hence, on global credit swings,” says Merrill. It predicts investment grade Peru and Brazil in late 2008 and regional growth of 4.6% in 2008.