Latin Amercian Growth Slowing – But Still a Safe Haven for Investors

Rio de Janeiro, 28 July 2008. Latin American growth is slowing thanks to rising inflation, with the causes of its economic growth over the last few years threatening to derail its efforts. It remains attractive as a region to investors, however, thanks to its positive carry trade.

With its large supplies of oil and grain, the region experienced very strong economic growth from 2002 onwards. Large exports Brazil, Mexico and Chile in particular were beneficiaries. In the period from 2002 – 2006, 26 million Latin Americans climbed out of poverty, according to the UN.

The rise in oil and food prices is now rebounding and starting to hurt domestic economies. With the threat of inflation growing, central bankers in the region are tightening monetary supply, further reducing growth. 16 million people in the region are at rising of being dragged back down below the poverty line.

Columbia is the latest country to raise interest rates which have now been set at 10%, the highest figure for seven years. The Columbian central bank has lowered 2008 GDP growth forecasts to the 3.3% – 5.3% range, a significant drop from the 7.5% growth experienced in 2007.

Inflation was a major scourge in the region up until the nineties. Central banks in the region have been building foreign reserves and reducing new money supplies, and this has helped to put a lid on price rises. But IMF figures show regional inflation rising from 5% in 2006 to 6.3% in 2007, with 8.1% projected for 2008. The worst offender is Venezuala with a 29% rate, but Boliva is also struggling with 16% inflation and Argentina has reached 9%.

Despite these tightening positions, the carry trade continues to be attractive to investors. “Low returns are better than no returns or outright losses” said Hosni Afleck, Chief Analyst of EconomyWatch.com. “Mexico, Brazil and Chile are likely to continue as carry trade markets over the course of the year.”

Vladimir Gonzales, EconomyWatch.com