The real risk

Instead of politics, market watchers point to higher-than expected rate increases by the U.S., a greater-than-expected U.S. 2007 economic slowdown, or a sharper downturn in overall global growth as the key risks for the major Latin American economies and currencies. As the U.S. is one of the main consumers of Latin exports, slower American growth could result in weaker Latin GDP prospects.

“The bigger issue is whether the draining of global liquidity will lead to a sharper-than-expected slowdown in global growth, and with it a sharper correction in commodity prices,” BNP’s de la Fuente says. “If the Fed does raise rates more than expected, it could be bad for Latin America.”

Enrique Alvarez, head of Latin American research at Ideaglobal, agrees.

“The more negative stories you see about global growth, the more pressure will be seen throughout the region,” he says. “Lower exports of commodities will weaken Latin American currencies.”

“Inflation concerns in the U.S. are affecting expectations in the Latin American markets,” Moody’s Coutino adds.

Economists at Moody’s also expect U.S. growth to retreat to 2.6 percent in 2007, a slowdown driven by declining consumer spending and a pullback in the housing market.

The outlook for the region’s major players appears to be cautiously optimistic in the near future.