Tags: IDB | Latin | America | Vulnerable

IDB: Latin America More Vulnerable Than Pre-2008 Crisis

Sunday, 30 Mar 2014 01:37 PM

Latin America’s vulnerability to external shocks is greater today than before the 2008 financial crisis because governments have increased spending and companies have taken on more foreign debt to fuel growth, the Inter-American Development Bank said.

“History teaches that exits from extremely low U.S. interest rates may be smooth or bumpy,” the IDB said in a report released Sunday at its annual meeting in Costa do Sauipe, Brazil. “Changes to the expected path of short-term U.S. interest rates could affect capital inflows that have strong and persistent effects on growth in some countries.”

Assuming the U.S. tapering is implemented without surprises, economic growth in Latin America will be 3 percent in 2014 and 3.3 percent in 2015, the IDB said. That is close to the fastest pace the region can grow without stoking inflation, the bank said.

The outlook could be jeopardized by an accelerated unwinding of monetary stimulus in the U.S. and a protracted slowdown in China, according to the report. Efforts to boost growth through increased spending have led to a further deterioration of public finances in 2013, the bank said.

“There is less space now to respond if there is a negative shock,” IDB economist Andrew Powell, who coordinated the study, said in an interview by phone from Washington.

Higher Debts

Countries in the region on average saw their budget balance deteriorate by 3 percentage points of gross domestic product from before the 2008 crisis. This helped drive debt ratios to 42 percent of gross domestic product from 36 percent of GDP in 2008.

Brazil’s credit rating was cut by Standard & Poor’s on March 24 to BBB-, the agency’s lowest investment-grade rating, from BBB. Sluggish economic growth and an expansionary fiscal policy are fueling an increase in the country’s debt levels, S&P said.

Only three of 21 countries improved their primary budget balances in 2013: Uruguay, Honduras and Nicaragua, the IDB said.

After expanding at twice the speed of the 1980s for the last decade, economies in Latin America last year expanded 2.4 percent, according to data compiled by Bloomberg. That was the slowest pace since 2009, as policy makers struggled to find new engines of growth amid waning commodity prices and stuttering global demand.

Countries relying on metals are more vulnerable to a Chinese slowdown than food exporters, Jose Juan Ruiz, IDB chief economist, said Sunday.

Southern Cone

“Economies, if they want to sustain high growth, they have to grow by investing more and this will be much harder,” the International Monetary Fund’s Western Hemisphere Director Alejandro Werner, said Saturday at an event on the sidelines of the IDB meeting. “We are seeing a slowdown in the rate of growth in Latin America, especially the southern cone, that will have a semi-permanent nature in the next few years.”

The region will grow at a slower pace than global average in coming years, Ruiz said.

“That is not enough to meet expectations and social challenges,” he said.

A credit boom over the past decade, which has been financed in part by increasing international borrowing, helped fuel growth in Latin America. As higher returns in advanced economies reduce demand for financial assets in the region, possible rapid currency depreciation may produce knock-on effects in domestic financial systems, the IDB said.

Foreign Bonds

IDB data indicate that companies relied more on foreign bond markets after the 2008 crisis. Banks and corporations in Brazil, Chile, Colombia, Mexico and Peru and their subsidiaries abroad increased their foreign issuance to $343 billion in the four years through the third quarter of 2013, up from $97.6 billion in the four years through the third quarter of 2008.

Increased bond issuance in foreign currency increases vulnerability that could create liquidity squeezes in financial sectors and potential solvency issues for companies, the IDB said.

“Though the region’s economies are on a more sound footing than they were during the shocks of the mid-1990s, most countries are in a weaker position than they were in 2007, prior to the onset of the Great Recession,” the IDB said.

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Latin America's vulnerability to external shocks is greater today than before the 2008 financial crisis because governments have increased spending and companies have taken on more foreign debt to fuel growth, the Inter-American Development Bank said Sunday.
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Sunday, 30 Mar 2014 01:37 PM
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