Fitch: Chile, Peru best prepared for downturn of global economy; Argentina and Venezuela most vulnerable
Chile and Peru are best positioned in Latin America to withstand a downturn in the global economy and a drop in commodity prices, while Argentina and Venezuela are the most vulnerable to any turmoil, according to a senior official from Fitch Ratings.
Both Chile and Peru have large rainy-day funds and their government debt is a relatively small fraction of their economic output at about 20% or less, indicated Shelly Shetty head of the sovereign ratings for Latin America.
The two countries have the fiscal flexibility to cope with a potential drop in capital in-flows, sharply lower prices for metals -their main exports- and volatile swings in exchange rates, Shetty said.
Colombia, Brazil and Mexico can also counter any shock waves from abroad, but to a lesser extent, she said.
Among the other large Latin American countries, Argentina and Venezuela would be the hardest hit by slowing global growth and a fall-off in commodity prices: oil in the case of Venezuela and soy prices for Argentina.
A slowdown in China will hurt the region's economies, especially those with large, commodity-based export sectors. A rule of thumb says a 1% decline in China's growth rate will cut growth by about 1.2% in the commodity exporters, she said.
The regional economies most exposed to China, the world's largest growth driver this past decade, are Brazil, Chile, Costa Rica, Peru and Venezuela, according to Fitch.
As for the impact of Europe's crisis on the region, trade exposure to Europe is concentrated more in the southern cone region of South America: Brazil, Argentina, Chile and Peru and less in Mexico and Central America, added Shetty.
Our view is still that Latin America as a region is well placed to withstand external shocks that might emerge from the intensification of the Euro zone crisis, said Shetty.
Having said that, it's also true that Latin America would certainty not be immune to what goes on in the euro zone.
Brazil is less exposed than Chile, whose economy is more open, she said. But Chile, which has the highest investment grade rating in Latin America, has a history of being fiscally prudent when necessary, she said.
Trade exposure to Europe really varies across the region and that's an important point to make, she said.
Government debt in Chile is about 10% of GDP, while in Peru it is about one-fifth of GDP, exceptionally low when compared to leading Western economies, which have ratios at least several times higher.
Peru's fiscal stabilization fund is more than 5 billion dollars, or about 3.5% of GDP.
The market value of Chile's Economic and Social Stability Fund (FEES) stood at 13.156 billion at the end of 2011, according to Chile's budget office. That is equivalent to just below 6% f GDP.
Since the financial crisis in 2008, most of Latin America is in a better position to withstand external shocks, Shetty said.
Foreign reserves, for example, have grown to about 750 billion dollars from 500 billion several years ago, giving countries greater ability to withstand exchange rate swings, she said. The debt burden in Argentina, Peru and Brazil has also declined in recent years.