In the past Latin America was frequently at the forefront wheneconomic turmoil struck somewhere in the world. During the latestvicious international financial crisis the region is – fortunately – barelyin the focus. Even if, like everywhere, stocks and currencies have takena hammering, the countries – barring a few exceptions – are holdingup well by international comparison.

“The emerging markets are profiting from the high oil prices, but at high costs for the industrialized countries.” This theory is not commensurate with reality, given that most emerging and developing countries have to import oil and are therefore languishing under the meanwhile declining but still very high oil prices.

The battle for increasingly scarce foodstuffs is intensifying, sparking demonstrations, export restrictions and crisis meetings at the highest level. Whereas the soaring prices are clearly bad news for most of the world’s regions, they are much more positive for Latin America. There, the explosion in food prices has triggeredrising domestic consumer prices, but has at the same time led to high export surpluses in foods.

At the beginning of the seventies, Brazil was heavily dependent on energy imports. The oil crisis of 1973 therefore dealt a massive blow to the country. Within the shortest space of time, the trade deficit had ballooned tenfold and currency reserves had halved by the middle of the seventies. In the course of the industrialization policy, the goal of which was to substitute imported goods for domestic products and which culminated finally in the debt crisis of the eighties, Brazil endeavored to lower its dependence on oilimports. On the one hand, the country greatly expanded its own oil production and on the other it invested in developing alternative fuels such as ethanol.

The US economy is swooning. What are the implications for its southerly neighbors who have long benefited from the USA as the engine of the world economy? Will Latin America be infected and how severe will the impact be?

Since its discovery, Latin America has always been an important commodity supplier. From the days of Spanish and Portuguese galleons brim full with silver to the copper exports of the present day, the region has been providing the global market with raw materials. For years commodity prices had been at rock bottom, but for a few years they have been literally rocketing. What repercussions does this have for Latin America?

Thailand introduced them at the end of last year, Colombia followed suit shortly after. Chile and even Germany introduced them only to abolish them again later. What is meant are the controls on capital movement of the special kind, namely those intended to avert inflows of capital.

A look at the capital ties between the emerging markets and foreign countries produces a clear picture: capital is flowing into the emerging countries in grand style. However, on the other side, the emerging markets are themselves starting to engage in crossborder direct investment. This shows that globalization is not a one-way street.

The proverbial “a bout of sneezing in the industrialized countries means a bout of flu in the emerging markets” has often proved true, above all in Latin America.

In a carry trade you take out a loan in a currency with the lowest possible interest rates and convert the liquidity into a currency in which bank deposits and short-term money market instruments return high yields. As carry trade volumes rise, the exchange rate of the investment currency also rises, providing the investor with returns that exceed the difference in nominal interest rates. Of course, this works only until expectations are reversed, especially with respect to the exchange rate. When this happens, a reversal of capital flows is quick to follow, usually coupled with considerable losses for the investors.

The interest rate hikes by the central banks of the major currency nations have put pressure on the currencies of a number of emerging markets and caused spreads on the international bond market to drift up again slightly. Following the euphoria of recent years, this has prompted the prophets of doom to herald the approach once again of a new emerging market financial crisis.

2006 is election year in Latin America. More than twelve parliamentary and/or presidential elections are to be staged this year in Central and South America. Such an accumulation of election dates is enough to send jitters through most economists and investors. The anxious months leading up to the last Brazilian presidential election in 2002, when Lula's looming election victory spawned panic among the business community, have not been forgotten. Even if ultimately unfounded, the possibility of a change in government in Latin America has frequently cast doubt over the progress achieved, triggering considerable financial upheaval and capital flight.

Events in many of the region's important economies are currently characterized by political commotion: President Lula in Brazil is embroiled in a corruption scandal, Venezuela's President Chávez is making a name for himself as Latin America's do-gooder thanks to the country's high oil revenues, and President Kirchner in Argentina continues to staunchly oppose any approach to the IMF. So far, this has not had any negative repercussions for international inflows into Latin American investments; but caution is still advised.

The crisis year of 2002, when Argentina suspended its foreign payments and Brazil suffered a severe crisis of confidence, was followed by a year of stabilization in 2003 and a year of high growth momentum in 2004: Latin America’s GDP expanded by 5.6 %, the highest rate since 1997. A closer look reveals, however, that a number of things have changed for the better in recent years while much is still awry.

One of the surprising developments seen last year was the marked appreciation of most Latin American currencies against the US dollar.