Latin America

Could Latin America Recover Sooner than Advanced Economies

Although Latin America is not immune to the effects of the global economic crisis, the region is likely to suffer a smaller output decline and recover sooner than the advanced economies because Latin American countries in the main have run sound fiscal and financial policies, the director of the IMF’s Western Hemisphere Department said.

Public finances and macroeconomic policy frameworks have strengthened in most Latin American economies, countries have been able to pursue countercyclical policies and continue essential social and infrastructure spending. That meant the region could mitigate some of the effects of the recession on the poor and be prepared for an early recovery.

Because banking systems are generally sound, unlike those in Europe and the United States, domestic credit problems will be less of an impediment to renewed growth.

In fact, the worst of the downturn appears to be behind the region. Most economies in Latin America should turn around and begin to grow this quarter or next.  The IMF estimates that growth in the United States and Europe will not resume until 2010 and only then if the advanced economies take serious steps to cleanse bank balance sheets of toxic assets.

The former finance minister of Chile said that the IMF is “putting its money where its mouth is” by making available an expected amount of more than $60 billion in credit lines and precautionary loans to countries in the region. Neither the countries nor the IMF expect the funds will be drawn. They are meant to serve as an insurance policy to reassure investors that resources are available to support countries running good economic programs that, through no fault of their own, might have financing issues as a result of the global recession. The IMF Executive Board approved $47 billion for Mexico under the IMF’s new Flexible Credit Line (FCL) and is considering a request from Colombia for $10.4 billion under the FCL. The IMF has approved large precautionary loans for Guatemala, Costa Rica, and El Salvador.

Latin America’s current performance is a stark contrast to earlier downturns especially the one that accompanied the debt crisis of the 1980s, commonly referred to as the region’s “lost decade.”
In the past, excessive public spending, heavy external borrowing, and inconsistent monetary and fiscal policies often led to exaggerated economic cycles. Latin America used to perform much worse often by about 2 percentage points than the rest of the world during recessions. If world gross domestic product (GDP) grew 2 percent, Latin America’s was flat. If global GDP grew 1 percent, Latin America’s declined 1 percent.

The global financial crisis that began in a tiny part of the U.S. mortgage market and quickly spread to other markets and other regions of the world (especially Europe) at first affected Latin America little. But as the financial problems triggered recessions in the advanced economies, developing economies felt the effects soon afterward. Exports declined. Remittances from citizens working abroad fell. Tourism slipped. Jittery financiers suddenly stopped investing in the region.

Latin America’s GDP will fall about 1.5 percent in 2009 and grow by the same amount next year, according to the IMF’s World Economic Outlook released April 22. By contrast, advanced economies will experience a 3.8 percent decline in GDP this year and no growth at all in 2010, according to IMF estimates.

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