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Brazil's economy standing out

Economists used to joke that when the United States sneezed, Latin America caught a cold. But the financial pneumonia afflicting the globe doesn't seem to have hit parts of Latin America quite as hard.

Put it down to a decade of economic growth and sound fiscal management, traits not usually associated with Latin America.

"No one can avoid the events of the past few weeks, but we are seeing some countries better insulated than others," said Riordan Roett, director of Johns Hopkins University's Western Hemisphere Studies Program.

Brazil, Latin America's largest economy, stands out.

Brazilian President Luiz Inacio Lula da Silva was upset last week at the slow response of the world's central banks to the widening credit crisis.

"Lula was understandably angry with the mismanagement in the U.S., when (Washington officials) have been yelling at them for years to better manage their own affairs," said Roett.

Poverty-reduction programs put in place by Lula and his predecessor, coupled with sound fiscal management, have prompted impressive middle class growth, which in turn has fed a growing domestic market for higher-value consumer goods, from cars to computers. General Motors' third quarter sales in its Latin America division were up a record 16 percent.

A socialist, Lula wisely put aside income from the nation's massive commodity boom, building up national reserves.

In August, Brazil's reserves hit a record $218-billion, annual inflation was at 6 percent — low for Latin America — and its national currency, the real, had climbed to a nine-year high against the dollar.

"If the crisis gets here, it's going to be a ripple," Lula predicted on Oct. 5.

But the dramatic collapse of global markets last week proved too much. Brazil's stock exchange fell 28 percent, and the real suffered its steepest decline in a decade.

But like Wall Street, Latin American stocks rallied on Monday, soaring more than 14 percent.

That fluctuation makes economists less confident about Brazil's ability to withstand the global credit crunch. Because Brazil depends heavily on foreign trade in commodities such as soybeans, oil, iron ore, sugar and ethanol, a global slowdown will hurt its economy.

That said, Latin America is still better off today than in the past, analysts argue.

The World Bank's chief economist for Latin America and the Caribbean, Augusto de la Torre, last week characterized the economic situation in Latin America as "a better-built boat facing a nastier storm."

In some cases, developing nations in Latin America would not be hit nearly as hard as their more-developed neighbors, he said. According to the World Bank, average economic growth in Latin America will fall to between 2.5 and 3.5 percent in 2009, still higher than estimates for the United States and Europe, which analysts say won't exceed 1.5 percent and may drop below zero.

"In the past, when the region slowed, it went from low growth, from 2 or 3 percent, to zero. Now we're seeing from 5 or 6 percent maybe to 3, so it's very different," he said.

Much of the damage to regional stock markets was caused by foreign investors withdrawing money to cover losses elsewhere.

"When confidence returns you will likely see a search for quality investment," said Roett. "Countries like Brazil and Chile should benefit."

Banks in Brazil and Mexico were also less exposed to securities backed by risky U.S. mortgages.

Indeed, credit cards, car loans and home mortgages, are less available to average consumers in Latin America. Big retail banks issue mortgages, but unlike in America they hold the note rather than reselling them.

"Ironically, the region's reliance on cash makes it vulnerable to currency shocks but has insulated it from the credit crisis," according to Richard Child, former president of the Latin America and Caribbean Region at MasterCard International.

Times researcher Caryn Baird contributed to this report.

Country snapshots

Chile: The economy has been hit by falling copper prices, down more than 40 percent since May. Chile's currency and stock markets have plummeted, though they rebounded this week. The government pledged Monday to funnel $850-million to help exporters and small businesses. The government also plans to lend local banks $700-million to boost cash supply.

Argentina: Poor fiscal management has the country staring at yet another debt default.

Venezuela: Officials are predicting economic growth of about 6 percent this year despite a global economic slump and falling oil prices. Venezuela grew by 8.8 percent last year, but oil accounts for half of its revenue and 75 percent of its exports.

Mexico: The government says it will have to change its forecasts for economic growth, inflation and oil prices that it uses to set its 2009 budget. President Felipe Calderon warned that Mexico faced a fall in exports, investment and remittances as a result of the U.S. economic slowdown. Calderon said his country has enough foreign reserves to handle the global financial crisis.

Brazil's economy standing out 10/14/08 [Last modified: Tuesday, October 14, 2008 10:00pm]
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