Q+A: Eurasia on impact of crisis on Latin America

WASHINGTON, Dec 8 (Reuters) - Latin America's growth prospects have been hit hard by the global financial crisis as commodity prices slump, credit dries up and export revenues fall.

Christopher Garman of the New York-based consultancy Eurasia Group answered Reuters' questions in an e-mail interview on the impact the financial crisis might have in Latin America.

Garman is the head of Eurasia Group's Latin America practice, and is its lead analyst on Brazil.

Q - Which countries in Latin America will be hit hardest by the financial and economic crisis, and how serious are the political risks?

A - Countries throughout the region will suffer with the current global financial crisis, but the countries most likely to undergo significant economic or political crisis may be precisely those who have embarked upon heterodox macroeconomic policies or policies of resource nationalism.

Much will depend on the extent to which commodity prices remain depressed over the next two to three years, but Argentina, Venezuela and Ecuador look particularly vulnerable. Venezuela and Ecuador due to their dependence on oil production for fiscal revenue, and Argentina due to the macroeconomic imbalances which have become exacerbated due to the current crisis. Politically, that spells for a very challenging environment for their incumbents over the next 2 years.

Cristina Fernandez de Kirchner's administration (in Argentina) looks the most vulnerable in comparison to Chavez in Venezuela and Correa in Ecuador. But the latter two may face growing fiscal challenges throughout 2009 and 2010. In countries like Brazil, Mexico, Colombia and Chile, incumbents will also be weakened, but they will most likely be able to muddle through much of 2009 without facing a significant economic or political crisis.

Q - Will President Hugo Chavez's socialist reforms in Venezuela be stymied by the sharp fall in oil prices? Are other socialist governments in trouble as oil and commodities prices fall?

A - Venezuela has enough assets to guarantee its financing requirements over the next 12-18 months even if oil prices remain at depressed levels, but the significant drop in oil prices will certainly limit Chavez's room to maneuver. The government will most likely continue to ratchet up spending in the run-up to the recently announced decision to hold a referendum which would eliminate current term limits, and is unlikely to reduce its pace of spending in 2009. Chavez is taking a huge gamble with the decision to hold a referendum given that voters tend to view a proposal to eliminate term limits more negatively than Chavez himself.

If he loses the referendum, which looks likely at this point, it could prove to be a significant political setback and strategic blunder.

Economically, if oil prices remain depressed and the government doesn't roll back spending, which would be unlikely if his government is cornered, fiscal constraints are likely to grow significantly.

Q - Ecuador has threatened to stop payments on part of its foreign debt. Will it default, or is President Rafael Correa just playing hardball in the search for a restructuring deal? Will other Latin American asset prices suffer contagion from Ecuador or is it an isolated case?

A - President Rafael Correa and his ministers are keeping the markets guessing over whether they will pay the missed coupon payment on the Global 2012 bonds when the grace period ends on December 15. The government could well opt to pay on December 15 and gain more time to try to reinforce the legal credibility of their claims, at least in domestic courts, and secure other external financing lines. Such a strategy looks likely at this point, but it is a hard call.

However, we feel that the government has entered a slippery slope that will ultimately lead to default, either on December 15 or at a later stage next year as low oil prices take a toll on revenues and risks over Ecuador's willingness to pay are compounded by liquidity shortfalls. For the region such a decision is unlikely to generate much of a contagion.

Q - Will Barack Obama's election as president help the United States regain sway in Latin America over such policy issues as free trade or will the region continue to look to partners like China, Europe and even Russia and Iran to reduce its reliance on the United States?

A - An Obama administration will be hamstrung over its ability to make significant policy overtures toward the region. In a recessionary environment we are unlikely to see significant progress on free trade agreements nor on immigration - two top issues for the region in which an Obama administration would be unlikely to run up against vested interests in the Democratic Party when unemployment is on the rise.