Latin America Combats Credit Crunch

The global financial crisis is taking a toll on Latin American economies and their financial systems that will lead to a sharp reduction in lending for the remainder of this year and in 2009. In a bid to reduce the negative impact on economies and banks as much as possible, governments, central banks and multilateral entities have been very active in providing liquidity and financing for banks and companies.

Central Banks to the Rescue?
Central banks in many Latin American countries have acted swiftly to inject of liquidity into financial systems to ensure credit does not dry up as a result of the global crisis.

Central bankers, finance ministers and the Latin American Banking Federation have repeatedly assured companies and the public that the region is better prepared than ever to face this sort of crisis, thanks to sound macroeconomic fundamentals and large foreign reserves.

Central banks in the largest countries have agreed to work more closely with one another through technical cooperation and information sharing, but interest rate decisions are still made at the national level, not coordinated among countries.

The Role of State Banks
Governments in several nations have also aggressively used public-sector banks to provide credit and other types of financing to particularly vulnerable to the crisis or those that are important for economic growth.

Brazilian federal banks Banco do Brasil and Caixa Economica Federal and Sao Paulo state bank Nossa Caixa have together made several billion dollars worth of financing available for various industries, among them the country's important export and automotive sectors.

Chile's government acted to increase the available capital of the country's only state bank, BancoEstado, by 50%, to the tune of some $500 million. This is to ensure financing for small and medium-sized companies and mortgage lending at favorable rates for the middle class.

State-owned Mexican development banks Nafin, Bancomext and Sociedad Hipotecaria Federal put up close to $7 billion to support the local capital markets, real estate financing and debt issued by non-bank financial institutions and residential mortgage-backed securities.

Multilateral Moves
Several multilateral entities have also pledged billions of dollars in liquidity for Latin America's financial system, as well as increasing regional credit lines and lending volumes.

The Andean Development Corporation (CAF), Inter-American Development Bank (IDB) and Latin American Reserve Fund together promised $9.3 billion in liquidity to aid the region's financial systems.

The CAF raised its credit lines for financial institutions in its 17 member countries from $1.5 billion to $2 billion.The IDB is speeding up loan issues and expects to lend a record $12 billion in 2009, and also pledged a $20 million financing facility for the region's 600 microfinance institutions and their 8 million clients.

Outlook
High inflation, rapidly falling commodity prices and deteriorating consumer confidence are all contributing to the more adverse outlook for the region's banks. Mexico's banking sector is especially troubled, with the possibility of bad loans increasing to more than 10% of total loans in 2009.

But Latin American banks are well-capitalized in general and have reasonable access to liquidity. In contrast to the gloomy economic outlook for developed economies, the region’s banking sector will continue to attract investments from some international banks and private equity investors in the near term.