The countries of Latin America, especially South America, are in a state of crisis for several years. But foreign capital in the form of direct and financial investments continue to flow into this region. This is an unprecedented case.
In the past the cessation of capital inflows, the so-called “sudden stop” was an essential feature of all crises in Latin America and other developing countries. The Latin American debt crisis of the 1980-ies became the reason for the stop, which lasted eight years. The financial crisis that erupted in mid-1997 in Asia and then spread to other developing countries, was the reason for the stop, which lasted six years. A failure in the inflow of capital caused by the great depression of the 1930-ies, continued for several decades.
But it seems that now the dynamics are changing. After the collapse of U.S. investment Bank Lehman Brothers in 2008, the capital inflows stopped only for one year. Moreover, despite the strong initial shock, the volume of capital inflows and the size of the risk Premia actually returned to normal in 2009, when Latin America began a surge in bond financing: the volume soon exceeded the average levels observed prior to 2008, three times.
The shocks that occur in the future, had even less influence on financial flows. In 2013, the US Federal reserve began to wind down the bond-buying program. In mid-2014, collapsed commodity prices. At the end of 2015 and early 2016, financial markets were shaken because of the events in China. Then US President was elected, Donald trump, and the fed started to raise interest rates, making it already twice.
Even Mexico, which has become one of the main targets of protectionist statements trump did not perceive their negative impact on the volume of external financing
However, the longest stop in bond funding caused by these shocks lasted only six months (this happened in the second half of 2015). The collapse of raw materials prices in 2014 cried the increase in risk spreads in Latin America, but only 1.5 percentage points is only a third of the level of shock after the collapse of Lehman Brothers.
Even more impressive is that the last two fed rate hike has not had any impact on risk Premia and volumes of financial flows, although the increase in rates has affected Latin America. The election trump has led to a rise in risk Premia in Latin America by less than one percentage point, and by the end of the year this award disappeared.
All Latin American countries, except Venezuela, have retained access to private external financing. Brazil had access to the capital markets, even during the peak of the political crisis last year. In April of last year, Argentina posted the largest-ever Latin American bond issuance. It happened after a settlement with dissenting creditors in a restructuring of previous debt has allowed to end its status of a rogue state in the capital markets. Ecuador also placed several bond issues. In the first quarter of 2017, the volume of bond placement in Latin America increased by 53% (year-on-year), the cost of these borrowings was lower.
Even Mexico, which has become one of the main targets of protectionist statements trump did not perceive their negative impact on the volume of external financing. Victory trump provoked devaluation of the Mexican peso, but the exchange rate soon returned to normal, returning to pre-election levels.
Does this mean that the days of sudden stops in external financing, as well as sharp reversals in the direction of capital flows has passed?
Due to the decline in interest rates since the financial crisis in developed countries became less attractive for investors
Not really. The fact that Latin America is now successfully avoids disruptions in funding can be attributed to two main factors. The first factor is regional. From 2003 to 2008 Latin America experienced a sharp decline in debt ratios. The commodity boom observed in that period, helped them to accumulate substantial foreign exchange reserves, so the size of the external debt of the region (net of reserves) declined from a level of more than 30% of GDP to below 6%.
The second factor is global. Due to the decline in interest rates since the financial crisis in developed countries became less attractive for investors started looking for higher yields on the markets of developing countries. In the case of new shocks in Latin America will be able to avoid sudden stops in the financing, if these conditions will continue.
Until that debt ratios in the region are growing, but at a moderate pace. On average, they are still significantly below those levels which were observed in the beginning of the century.
Policies adapting to the effects of the crisis were useful, although its price has become a major slowdown in economic growth and even recession. With regard to interest rates in developed countries, they will grow to until eventually not normalized, but this process is slow even in the United States.
The latter-day ability of Latin America to avoid sudden stops in external financing is good news. Apparently, this ability will persist for a long time. Because of this, the governments of the region showed some macroeconomic room for maneuver, allowing them to refuse to continue the policy of consolidation, enabling the economy of their countries to participate in global economic recovery, which is now observed.
José Antonio Ocampo is Professor at Columbia University, Chairman of the Committee for development policy issues in the Economic and social Council of the United Nations, formerly Minister of Finance of Colombia and Deputy Secretary General of the United Nations economic and social Affairs
Copyright: Project Syndicate, 2017