Politics, Business & Culture in the Americas

Are We There Yet?

International financial institutions, working together with governments, can restore the confidence needed to get markets moving again.

It is now clear that the advanced economies are facing a severe recession in 2009, with an output contraction of 2 percent according to the IMF’s latest projections. The volume of global trade in goods and services is expected to contract by almost 3 percent in 2009, and non-fuel commodity prices will likely decline by as much as 30 percent (while oil prices are expected to fall by about 50 percent). Global industrial production at the end of 2008, measured by the annualized threemonth percentage change, was already falling at an annual rate of over 13 percent, while the value of world merchandise exports contracted at an annual rate of over 40 percent. Although a portion of the sharp decline in world trade can be attributed to a collapse in trade finance in the fourth quarter of 2008, its severity poses significant risks to economic activity across the globe.

It’s easy to be pessimistic about what this will mean for Latin America, especially as troubling headlines spread across newswires almost every day. But smart action by both governments and international financial institutions could reinforce the region’s already considerable strengths and enable it to emerge from this crisis with minimal long-term damage.

This hope is anchored in the fact that the region’s policy framework and economic performance have strengthened significantly in the past decade. Latin America entered the global financial crisis after a five year period of significant and sustained economic expansion. Unlike the 1990s, when the region embraced financial globalization during a period of negative or neutral real shocks, the current decade is marked by positive, real trends such as an improvement in terms of trade, low world interest rates, and subsiding risk spreads (namely, the spread between the interest rate paid by an emerging market economy’s government on its debt and that paid by the U.S. Treasury).

Thus, instead of rising external debts and current account deficits, most countries in the region registered what have been called twin surpluses— in the current account of the balance of payments and in the fiscal balance. The benefits accruing from low inflation, sustained growth and strong financial sectors translated into an unprecedented accumulation of international reserves. The stock of international reserves in Latin America’s largest economies exceeds $400 billion, well in excess of the stock of short-term public debt…

 

Endnotes


Tags: Financial Crisis, International Financial Institutions, Latin America and Credit Markets
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