Global Bloom Places Latin America on Alert, Analisys Evr
Summary
“Global Bloom Places Latin America on Alert” by John Paul Rathbone exposes how latin American economic authorities and large companies are monitoring the slowing Asian demand and plunging commodity prices. Despite of being Latin America a shinning business spot, where local economies grow up 5% as yearly average, goverments and investors project a non-optimistic scenario wether China falls down. The main driver of the Latin American economy is the explotation of raw materials like cooper, soia and oil. Inherently, the fallen of the Asian giant is going to trigger into:
1.- Lower fiscal incomes by taxes and deacreasing invesment level. If the production of raw materials decrease, lower tax revenues will be collected by the treasury. The public budget must be reduced to sustain an expansional macro-economic policy. On the other hand, the recent fall in prices will discourage the injection of fresh capitals to the mining industry, agricultural and oil. In addition, the current ongoing projects will suffer a significant delay untill a recovery in global demand for raw materials.
2.- Current Account deficits will wide. A lower demand will generate a contraction of the exports. This negative gap will generate a debit in the trade balance. Thus, if the trade balance increase in behalf of imports, it will be a higher deficit in the Current Account.
3.- A drop in commodity-related capital inflows would force exchange rates lower. Some of the capitals, which should be destinated for the mining industry, will search new hot short terms business spots because assets value on international currencies could be more atractive for investors.
Key judgments
“I light a candle and pray that China wont crash.” Luis Castilla, Perus finance minister.