Global Perspectives | Spring 2009

Impact of the Global Financial Crisis in Latin America

Dear Friends,

The financial crisis that is gripping our nation and the world is deeper and more complex than any economic event in our lifetime. As we navigate through these troubled waters, I try to stay grounded in a few fundamentals—people living in poverty need and deserve a chance to earn a living and provide for their families, microcredit works (even during tough times), and Global Partnerships’ job is to sustain and expand opportunity for the long haul.

I am often asked, “What does this financial crisis mean for the borrowers?” The short answer is that rising food and energy prices make life a lot harder, and microentrepreneurs adapt to emphasize basic needs (people still buy rice, beans and tortillas even in a recession). Over the years, microcredit has shown remarkable resiliency despite economic crises and natural disasters.

Looking a bit deeper, the dynamics that are now affecting the U.S. economy are different than those in microfinance. Here at home, the roots of our financial crisis have to do with too many highly indebted consumers spending at unsustainable levels, overpriced housing assets driven by decades of easy credit, complex and unsound financial products coming home to roost, and financial institutions with 25- or 30-to-1 ratios of debt to equity unable to stand behind their commitments. The results, as we can see, are devastating.

These same dynamics are not at work in microfinance markets where borrowers have little access to credit, microloans are most often used for working capital in very basic enterprises, no complex financial products exist, and the microfinance institution (MFI) partners that we support operate with conservative debt-to-equity ratios of between 1 and 6 to 1. Moreover, U.S. financial institutions operate with lots of short-term deposits and mostly longer-term loans, which can put pressure on liquidity (the run-on-the-bank problem). MFIs, by contrast, usually operate with one- to five-year debt and make short-term loans, which means the MFIs have much greater degrees of freedom in managing their liquidity.

This does not mean that microfinance is somehow immune from the challenges now playing out in the global economy. We are seeing increases in the number of microborrowers that are slow in their payments, though at manageable levels. The most significant change we see is a tightening of the debt markets that allow MFIs to access the capital needed to grow their portfolios and serve more borrowers. As a result, MFIs are already slowing growth, which is financially necessary and sound from a business perspective, but of great concern from the mission perspective of helping more people.

In the cover article, we offer you a closer look at how two borrowers are responding in challenging times. It is a reminder that at the end of the day, we are all investing in people, in the spirit and ingenuity and hard work of our neighbors who are as committed as ever to improving their own lives.

Sincerely,

Rick Beckett

President and CEO

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