Latin America Is On The Cusp Of Biggest Shock Since 1980

In a new report, Bank of America analyst Marcos Buscaglia discusses what he believes could be the biggest monetary shock facing Latin America since 1980. However, despite the situation that these countries are currently facing, Buscaglia believes that most are better-positioned to weather the coming storm than they were in the 1980s.

Real risk of shock
The numbers indicate that Latin America, and particularly South America, is currently staring down a very real threat. Bank of America is estimating that global nominal GDP in USD will contract by $4.1 trillion (5.9 percent) this year. This contraction is a stark contrast to the average nominal GDP growth of about 6.0 percent from 1981 to 2014.

 

Dollar strength
Buscaglia acknowledges that this contraction could simply be blamed on the relative strengthening of the USD versus other global currencies. However, he explains that the same factors that are driving up the dollar are also acting to drive down commodity prices.

It’s bad, but not '1982 bad'
Despite the global GDP weakness, Buscaglia does not believe that Latin America is in for the same type of pressure that it felt in the 80s.

“The fact that sovereign debt was denominated in USD made creditors reluctant to continue lending in 1982, as they realized debt would be more difficult to serve after the forthcoming devaluations,” he explains.

This time around, most Latin American countries are allowing their currencies to float, are maintaining high reserve levels and have a significant amount of their sovereign debt denominated in local currencies.

Finally, Buscaglia predicts that the world will not see anything close to the 20 percent Fed fund rate that it saw in 1980 as the FOMC tried desperately to control inflation.