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Latin America must be vigilant to avoid crisis

11 Feb 2016

Will Latin America continue to face volatility?

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Latin America will continue to face problems if it fails to address growing debt, unemployment and waning interest from foreign investors, said former President of Mexico Carlos Salinas.

In the short term, heavy debt is a major burden for businesses across the region, said Salinas at London Business School's Latin America Business Forum event last week.

In the wake of the financial crisis, firms in all developing countries took on cheap debt at a time when emerging economies were driving global growth. 

By 2014, borrowing had climbed from $4 trillion (£2.7 trillion) to $18 trillion (£12.15 trillion), with Latin America accounting for a fair share.

Adding to the region’s problems is the halving of foreign investment and the heavy outflow of capital from Latin America to other continents. “The flow of capital is negative for the first time since 1988,” Salinas said. 

Investment from other countries totalled $548 billion (£377 billion) in 2015 compared to $1074 billion (£537 billion) in 2014, while the amount citizens invest in foreign markets is accelerating steadily year on year.

“In the medium term, any profits made are used to buy back equities and dividends instead of creating growth. There’s no physical creation of jobs,” said Salinas. 

He added that companies were using this investment strategy to ease their foreign debt burdens. The concern is that businesses may be using their scarce resources to subsidise their creditors, or worse, exposing themselves to risk in foreign markets, according to the former president. 

He also expressed concerns about China’s global impact. “If China is slowing down, the rest of the world is too,” he said.