LatAm Watches for European Contagion Risks

After dodging a bullet in 2008’s financial crisis and subsequently fixing vulnerabilities exposed during that period, LatiAm policymakers feel more prepared than ever to face future contagion risks. Events in Europe, however, are being watched with increasing unease amid the realization that the continent’s debt predicament will eventually wash upon the region’s shores. Weakness in the commodity complex, volatility in the FX rates, and a lengthy lull in capital markets activity are just some of the areas of susceptibility for LatAm. For now at least, the immediate horizon looks stormy but manageable. JPMorgan estimates that LatAm growth should dip to 3.2% in 2012 from 4.0% this year, putting it behind its 3.6% potential, but not by far. “Needless to say, we will experience some turbulence because of the interconnectedness of the global financial market, but we feel our main financial variables will be anchored by the strong fundamentals,” Augustin Carstens, Mexico’s central bank head, told LatinFinance earlier this year. Though the region is still reliant on foreign capital, the development of local markets means borrowers now have an important alternative funding pool. However, successes on this front have created their own challenges at a time when foreign investors have become increasingly enamored by local currency plays. These often crowded trades leave countries once again exposed to sudden movements in international portfolio flows. “A lot of the selloff has been in those countries where the foreign position has been highest,” says Joyce Chang, head of emerging markets and global credit research at JPMorgan. Indeed, the notion that LatAm can decouple from events in G3 countries has been broadly rejected. “Under the current conditions, there is a pretty good external backdrop for the most part,” says Javier Kulesz, chief economist for Latin America at UBS. “But if we move to a more hostile environment, LatAm will not decouple.” Balance sheets and reserves migh