Capital Flows to Latin America 2007 Highlights

Despite strong growth in 2007, global conditions were not as upbeat as in 2006. Since late summer, after a brief bout of turbulence in late-February and early-March, summer credit concerns have dominated global financial markets, as the crisis in the U.S. mortgage and structured markets fuels a global move towards risk aversion. Despite the increase in risk aversion in the second half of the year, capital flows to Latin America expanded in 2007, becoming a key factor behind the appreciation of regional currencies and the accumulation of international reserves. Capital inflows in 2007 contributed to keep credit spreads at low levels and to help borrowers to increase new bond issuance and engage in liability management. Although emerging markets and Latin American spreads widened slightly in 2007 as a result of the turmoil in global financial markets, they remained at historical lows.

Latin American markets showed remarkable resilience in face of broad global financial market turbulence. A prominent feature of 2007 was the lack of negative spillover to the region from the U.S. mortgage and credit crisis. For the first time in recent history, the external meltdown did not spark capital flight from Latin American markets. Quite the contrary, emerging and Latin American markets were seen by investors as a safe heaven from the subprime woes afflicting the U.S. economy.

Finally, emerging markets countries, particularly in Latin America, have continued to reap the benefits from the commodities boom, while rising oil prices during most of the year continued to be a net positive on oil exporter countries. Inflationary pressures rose in 2007, however, and inflation emerged as a key macroeconomic theme, albeit a positive one for inflation-linked instruments.