(Global Biz Insight)Commentary: Fed's rate hikes likely to disturb LatAm's economic recovery

The United Nations Economic Commission for Latin America and the Caribbean released its latest economic growth forecast on Dec. 14, announcing that the region will close 2016 with an average contraction of 1.1 percent and "experience modest growth of 1.3 percent in 2017."

Coincidently, the U.S. Federal Reserve on the same day raised its benchmark interest rate by 25 basis points to a range of 0.50 percent to 0.75 percent and indicated a faster rate hike pace next year.

Affected by the Fed's rate rise, currencies in major LatAm countries are experiencing different levels of devaluation. The Mexican central bank urgently raised its overnight interest rate by 50 basis points to temporarily offset the negative spillover effect of the Fed's move.

Yet continued Fed interest rate hikes would lead to a strong U.S. dollar, bringing uncertainty to Latin America's economic recovery.

First of all, the Fed's rate hikes will lure an outflow of capital from LatAm countries to America, causing more debt risks to these countries. The capital loss will increase their debt burden and hit some LatAm countries hard as they rely heavily on international "hot money."

In the 1980s, the U.S. suddenly tightened its monetary policy after years of quantitative easing, triggering a 10-year debt crisis for Latin America, historically called "the lost decade" of the region.

Second, the Fed's rate hikes will push up borrowing costs, dampening economic stimulus measures.

To deal with their flagging economies, major Latin American countries like Brazil, Mexico and Argentina have all announced a series of economic stimulus policies such as expanding infrastructure and energy projects, which need a large amount of external funds.

The Fed's rate rise will force the central banks of these countries to raise their interest rates as well and devaluate their sovereign currencies, driving up the borrowing costs of foreign capital.

Third, America's interest rate hikes will also affect the export capabilities of some primary exporting LatAm countries.

Recently commodity prices have rebounding vigorously at the international market, greatly benefiting some Latin American countries such as Brazil, Chile and Peru which depend heavily on commodity exports.

Yet after multiple Fed rate hikes, international commodity prices are expected to be dragged down, weakening the export earnings of the above countries.

However, facing the above risks, the economic prospects for Latin America are not as gloomy as one thinks. Compared to the debt crisis in the 1980s and the financial and monetary crises in the early 21st century, most LatAm countries have greatly improved their ability to defend themselves from external financial risks thanks to richer foreign reserves and more cautious fiscal policies. Endi