Latin America may have a new story to tell. After years of debt-ridden governments with poor fiscal discipline, market watchers say the region is looking stronger and healthier than ever.
Structural changes may account in part for the recent bounce-back in Latin American currencies — particularly the Brazilian real (BRL) — following the global creditcrunch panic in August, which saw the liquidation of many emerging-market positions.
As of Sept. 25, the Brazilian currency had returned to its mid-July levels in the wake of the August global money shift away from risk.
Brazil is considered by many global money managers to be the star of Latin America, and its currency has appreciated strongly this year. The dollar/real rate (USD/BRL)began 2007 around 2.13, but by mid-July real strength and dollar weakness had pushed the pair down to the 1.85 level (Figure 1).
Huge capital inflows from foreign direct investment supported the real throughout much of 2007, as global players flocked to Brazil’s high interest rate, robust growth, and strong current account picture.
“Then came the jitters from the credit crunch crisis and the real depreciated because of risk aversion, hitting 2.09 on Aug. 16,” says Italo Lombardi, emerging market economist at Ideaglobal. “Portfolio managers did with Brazil what they’ve done with all emerging markets and higher beta trades — they liquidated and went to safe haven.”
However, by Sept. 28 the real had retraced most of its August losses and was trading below 1.84.
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