In the midst of growing concerns across the globe pertaining to the onset of a downturn in the U.S. economy, Latin American macroeconomies will surely endure some hardships as a result, sources say, and securitization transactions just may be the alternate source of financing for some of the countries.
Consensus on the downturn of the U.S. economy among analysts and economists is that it will be "a rough landing, not a recession," said a sovereign debt analyst at J.P. Morgan Chase & Co. "[In the U.S.] we are looking at 175 basis points in rate cuts over the course of the year and virtually no growth in the first quarter, but growth for the year of 1.6%. That's enough to keep a little bit of demand going."
Nonetheless, effects of the downturn will ripple through various Latin American countries. "Spreads are going to widen and there will be a lot of nervous people because Latin America very clearly depends on the United States, as do not only the emerging markets, but Europe as well," said a director at MBIA. "The United States is the world's biggest importer by far and over the past few years, with our huge current account deficit, the trade deficit, the U.S. has been the locomotive that has kept things going along in the world."
An Uptick In Securitizations?
The downturn could potentially create a decline in U.S. asset process, which could lead to less liquidity in the capital markets, according to sources. In turn, it will become more difficult for Latin American countries to fund current account deficits.
According to Roger Scher, sovereign analyst at Fitch, a global liquidity squeeze ushered by a hard landing in the U.S. would make it more challenging for Latin governments to borrow in the international capital markets. "That could keep their cost of borrowing high, which could affect domestic interest rates and result in slower economic growth," Scher said. "Brazil's government largely funds domestically, but lower capital inflows into Brazil could postpone a lowering of domestic interest rates, affecting the government's domestic borrowing program."
Many sources agree that Latin America may look to securitization transactions in the coming months to service external debt. "If the U.S. has a recession or a slowdown, clearly that will make Latin American economies a little bit weaker; interest rates will go a little high and it will create more of an interest and more of an opportunity to do securitized transactions," the MBIA source said. "Our general view is that this is probably a good thing for the market because when the economies are too strong, everyone is throwing money their way and they don't need to go through the structured market, they can go to banks."
Scher agreed: "Speculative-grade borrowers may be looking for creative ways to finance, like securitizations - there could be an increased need there." Accordingly, cross-border transactions will likely see the most significant change.
On the other hand, while the MBIA source believes securitization will be the avenue Latin America turns to for financing, he warned that if lenders view the widening of spreads as an underlying risk, they may be a bit reluctant to lend.
Additionally, other sources are not as confident that securitizations will pick up. "I think securitization depends more upon having strong companies available to do securitizations in these countries and the relative spreads they can get on securitization versus other forms of financing," said Patrick Kearns, senior director at Fitch.
Mexico, Brazil, Chile & Argentina
Mexico is likely to feel the initial sting, considering its strong ties to the U.S. Almost 90% of Mexico's exports are imported by the United States. "Mexico benefited from a strong U.S. economy so Mexico could be affected if there's a recession or a hard landing in the U.S." Scher said. "Mexican growth has been strong because U.S. growth has been strong."
Unlike Mexico, only about 3% of Brazil's GDP depends upon the U.S., according to sources. Brazil has a rather closed economy and endured a slow growth rate of about 0.7% in 1999. In 2000, the country headed down a strong path to recovery, with improved economic policies and lower interest rates from the central bank. Expected growth rates for Brazil at the end of 2000 were about 4%. However, according to Scher, those forecasts are being slightly scaled back by most analysts to about 3.5% as a result of a possible hard landing in the U.S.
Chile is a more open economy than Brazil and exposure to the downturn will not come directly from the U.S. However, if Asia slows dramatically as a result of weaker U.S. demand, Chile will be hit as a result of a domino effect.
Nearly one third of Chile's exports are to Asia and another third are to the U.S. "In Asia, we are expecting a slowdown in growth as well, partly because of U.S. demand. In particular the production of electronics will decline as the U.S. economy slows," the J.P. Morgan analyst said. "A combination of both regions slowing would be bad news for Chile."
However, the current economy in Chile seems to be thriving with an estimated growth rate between 5.5% and 6%, which leads the J.P. Morgan analyst to believe that Chile is in a position to weather this kind of slowdown.
When it comes to Argentina, there hasn't been much good news lately. "In a sense, when U.S. interest rates come down and maybe the dollar loses some of its strength in the foreign exchange market, that's a reversal of the situation that has created some of the problems for Argentina, so Argentina benefits from a situation like that," the MBIA source said.
However, that is not to say that Argentina would benefit from a downturn in the U.S. The MBIA source added, "There's a lot of inherent weakness in a country like Argentina and so when stress comes on in a time like that, for a country like Argentina, that little bit of help may be offset massively by a decline in the U.S. economy."
All in all, the future is still unknown; however, the chances of the securitization market picking up looks rather favorable, according to most sources.
Perhaps the source at MBIA said it best: "All you have to do is look at the actions of the Fed; they decided that the big issue, when they had their formal meeting, is inflation and a couple of weeks later they are giving us a 50 basis point cut.
"The U.S. is definitely in a downturn and the question in my mind is what the stock market is going to be doing to consumers. And, how deep and how long will it be? It could make it very difficult for everyone in the world if we don't have a shallow and a short downturn."
