10 October 2008
Latin America Adjusting to World Financial Turmoil
Remittances continue to flow to recipients in Central America
Washington — The countries of Latin America and the Caribbean are adjusting to the world financial crisis, several economists tell America.gov. This is a region where remittances sent home by immigrant workers in the United States and elsewhere are a major source of money.
Manuel Orozco, a senior associate in the Remittances and Development Program at the Inter-American Dialogue, a Washington public policy group, says the economic upheaval offers no “easy answers.” But he said it can be mitigated if banks reach out to people who receive money transfers from abroad, known as remittances.
Orozco said that even though remittances to the region have dropped off recently, the drop-off is relative.
“So far, there is a declining pattern in Mexico, but not in other countries” in the Americas, Orozco said. He said remittances fell in August in El Salvador and in July in Guatemala, but “those drops are not an indication of a major pattern.”
In a study on remittances to Latin America that he provided to America.gov, Orozco said accelerating the use of banks by Latin America and Caribbean remittance receivers will help mitigate a major liquidity crisis in the region. Liquidity refers to the ability of an investment to be quickly converted into cash. Economists say many people in Latin America and the Caribbean do not put remittances into banks, which hurts the region's financial system and lessens the investment potential of a remittance.
President Bush and other Western Hemisphere leaders at the January 2004 Special Summit of the Americas in Monterrey, Mexico, set a 2008 goal of cutting by 50 percent the cost of sending home a remittance. Hemispheric leaders are expected to discuss reducing remittance costs at the April 2009 Summit of the Americas in Trinidad and Tobago.
Already, the U.S.-Mexico Partnership for Prosperity, established in 2001, has helped cut in half the cost of sending money transfers from the United States to Mexico, according to the U.S. Treasury Department.
Under that partnership, the Treasury Department has been working with other U.S. government agencies to increase the efficiency of remittance services for senders and receivers and to make these services more affordable and accessible to more people. (See “Conference To Discuss Surge of Remittances to Developing World.”)
David McCormick, the Treasury’s under secretary for international affairs, said in an October 3 speech that the U.S. government has taken “bold and decisive actions” in recent months to address the “underlying sources of market uncertainty.” Europe and Asia are also suffering through financial turmoil, McCormick said. (See “World Markets Remain Hesitant Following Financial Rescue Plan.”)
SOUTH AMERICA LESS VULNERABLE TO CRISIS
Manuel Lasaga, president and co-founder of StratInfo, a Miami economics and finance consulting firm, said countries in South America are less vulnerable to the crisis because of their reliance on commodity exports, which surged in recent years as the result of rapid growth in worldwide demand.
Because of the strong growth in these South American economies, Lasaga said, “the economic and financial shocks from the United States will be less severe.”
South America’s strong external accounts and ample international reserves mean “they have a good buffer against the effects from the downturn in the United States” and elsewhere, he said.
Mexico and Central American countries are most affected by the crisis, he said, followed by the Caribbean, because of their close economic ties to the United States. Lasaga said these economies rely on remittances from the United States, “which will decline as a result of the recession, as well as on assembly of manufactured products, tourism and other services which will also be adversely affected by the recession.”
Lasaga cited vulnerabilities in regional economies that could place some countries’ financial systems at risk from the same sort of overextensions as occurred in the United States. South American currencies, he said, “are also at risk after having appreciated substantially with respect to the U.S. dollar during the past three years.”
GROWTH IN LATIN AMERICAN ECONOMIES EXPECTED TO CONTINUE
Mauricio Cárdenas, director of the Latin America Initiative at the Brookings Institution in Washington, said Latin America has been growing economically “at a very good and high rate.” The global financial crisis, he said, implies a deceleration of that growth, “but by no means a recession.” That suggests the region’s economies will slow, but not stall.
An overall 5 percent annual growth rate for Latin America could drop to somewhere between 3.5 percent and 4 percent, Cárdenas said.
“The closer the economies are to the United States, the harder they’ll take a hit,” Cárdenas said, which means that Mexico will be more affected than Brazil, for example. In fact, Brazil is likely “to grow more than was initially predicted, whereas Mexico will grow below the original projection,” Cárdenas said.
Cárdenas said remittances will continue to grow for Central America, although “at a much slower pace” than before.
The full text of McCormick’s speech is on the Treasury Department’s Web site.
For additional information, see a fact sheet on the United States and the Summit of the Americas.
More information about the summit process is available on the Web site of the Organization of American States.
