Latin American Economics

The booming prices for Venezuelan oil, Brazilian soy beans and Chilean copper that brought prosperity to Latin America are heading for a bust that threatens to erode the hard-won gains of its poor and newly emerging middle class.

The global financial meltdown is cooling demand for commodities, the engine that fueled more than a decade of growth and erased generations of suffocating international debt.

For Brazilian farmer Aldemire Rostirolla and millions of others who rode the boom, the new reality is sobering.

Rostirolla worked 18-hour days for a dozen-plus years to coax corn, sunflower and soy from his sprawling piece of savannah on the edge of the Amazon. Now he may have to let his fields lie fallow as prices plummet for his crops.

Worried they might not break even in their next harvest, the 54-year-old farmer and his neighbors aren't sure it's worth investing in tractors or fertilizer. Some may have to sell their land because they can no longer get the loans they need to finance planting and harvesting.

"The question everyone here is asking is: How much more will commodity prices fall?" Rostirolla asked.

Latin America's reliance on raw material exports has long kept its economies from diversifying, driving them to take on huge foreign debt and triggering some of the world's biggest defaults. But as prices soared in recent years, governments used that commodity cash to pay down debts and build up reserves.

This "war chest" of public savings could help the region combat the global credit crunch, possibly enabling a rebound by 2010, said Eduardo Levy-Yeyati, head of Latin America research at Barclay's Capital in New York.

"They're going to suffer the crisis, but they're going to suffer less" than they would have in the past, he said.

In the meantime, though, much damage could be done.

Prices for commodities including crops, metals, oil and other raw materials have dipped by a third from their July peak.

That kind of slump has an outsize impact on Latin America, where most economies still haven't diversified enough, and some rely on commodities exports for nearly half of government revenue and hundreds of millions of jobs.

"I predict a rather dark, unpleasant future in coming months," as exports, investment and lending decline simultaneously in an unprecedented triple-whammy, said Peter Hakim, president of the Inter-American Dialogue, a regional think tank in Washington D.C.

"Commodities alone could do a lot of damage, but when it comes in this combination, things could be much more explosive," he said.

Latin America's major stock indices have lost at least 20 percent of their value in the past two weeks as wary investors pull cash from emerging markets. Brazil's commodity-heavy benchmark Ibovespa index is leading losses, down 35 percent since Sept. 25.

Add to that the ways the financial crisis has dried up credit for farmers and mine operators, and analysts see no easy fix.

"We're in the eye of the storm, so it's difficult to determine whether this financial instability will be temporary or whether it will cause lasting harm," said Luis Moreno, president of the Inter-American Development Bank.

Investors worry that Argentina, one of the world's top grain exporters, may not be able to maintain a budget surplus and keep servicing its debt now that soy and wheat prices have sunk more than 40 percent from this year's record peak. Chile, the world's top copper producer, had its first trade deficit in eight years last month, after copper prices slid 45 percent since May.

The hardest-hit countries are likely to be oil-reliant Venezuela and Mexico, analysts say. Both draw more than 40 percent of their federal budgets from oil, which has dropped more than 45 percent to hover around $80 a barrel since hitting a record high of $147.27 on July 11.

Venezuelan officials insist they'll keep funding President Hugo Chavez's sweeping social programs, which have paid for everything from free eye surgeries for poor Latin Americans to cheap home heating oil in the U.S. Northeast.

And while Venezuelan Finance Minister Ali Rodriguez warned of "significant restrictions" in next year's budget, the only examples he gave were to slash parties, cars and cell phone use by government workers.

A commodities collapse "could put Chavez and all his massive expenditures in a very tight skirt," said David Fleischer, a political scientist at the University of Brasilia.

Meanwhile, in Mexico, America's third-largest oil supplier, falling crude prices have pushed the peso to record lows, prompting the Central Bank to auction $8.9 billion in reserves this week to stem the decline.

President Felipe Calderon unveiled $4.4 billion in emergency spending on roads, schools, hospitals and an oil refinery to create jobs and boost growth. But his treasury department still slashed its growth forecast for 2009 from 3 percent to 1.8 percent — one of the lowest in the region.

Poorer countries have fewer options.

In Bolivia, some hard-hit mining companies have pressed local officials to cut their water and electricity bills to make up for lost export income. Prices for zinc, Bolivia's top metal export, have tanked 70 percent from a 2006 high, forcing private mine operators to lay off workers.

In the Andean town of Potosi, clogged with Hummers brought in during boom times, struggling miners are now desperate to unload the luxury vehicles. But they can't find any buyers, said Limbert Paredes, manager of the Potosi Mineral Refiners Association.

"When the boom passes, you've partied away all the money you've earned over the last two years, and you're back in misery again," he said.

Source - AP