Brazil’s ‘graduation’ into the league of countries rated investment grade thanks to S&P’s upgrade in late April marks an economic divide of South America. Brazil, along with neighbors such as Colombia, which also regained the coveted investment grade rating in June of last year after losing it in 1999, and Peru, represent a set of countries that are taking full advantage of the extremely supportive global environment of the last few years.
An unprecedented combination of above trend global growth, abundant liquidity, low inflation and a low interest rate environment, coupled with booming commodity prices, has to some degree lifted all economies in the region. However some of the countries that have profited the most on account of very large commodity exports are struggling today.
The windfall export revenues that countries such as Argentina, Bolivia, Ecuador and Venezuela have experienced during this cycle is largely being squandered. Their economies have grown, exports and fiscal revenues have ballooned and external accounts have strengthened, yet they remain highly dependant on external markets and therefore vulnerable to shocks outside their control. Violation of private property and absence of the rule of law, weak institutions, political uncertainty and political interference at multiple levels of the economy have not helped to foster an environment supportive of investment, sustainable growth and job creation.
What role have commodity prices played in the region? The abundance of natural resources is one common denominator in South America, but its impact beyond the strictly cyclical timeframe is mixed. For instance, Chile, the highest quality credit country in the region, which relies on minerals for more than 60 per cent of its exports, became a single A rated country in the mid 1990’s when minerals traded at a fraction of today’s prices.
Venezuela, on the other hand, an economy that derives 90 per cent of its exports from crude oil, languishes as a junk rated country, unable to capitalize, on a structural basis, on crude oil prices that have quadrupled in the last four years alone.
Still, financial collapse or debt default in this lagging group of countries remains a low probability event in the short and medium term on account of low indebtedness and large reserves.
Gorky Urquieta, head of emerging market debt, ING Investment Management.
