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IMFSurvey Magazine: Countries & Regions

Latin America Appears to Escape Market Turmoil

Soybean harvest in Argentina, where rising commodity prices are one factor reducing vulnerability to external shocks (photo: Diego Guidice/KRT)

Managing Director speech

Latin America Appears to Escape Market Turmoil

IMF Survey online

October 9, 2007

  • Latin America should escape most effects of recent financial turbulence
  • Several developments suggest region now less vulnerable
  • But prolonged world decline would also hit Latin America hard

With global growth likely to decline only modestly next year due to recent financial market turbulence, the IMF expects Latin America to face a slight growth slowdown, although the picture for the region "remains basically good," IMF Managing Director Rodrigo de Rato said.

He noted October 8 that if the region avoids all but a slight decline in growth, that would be "a notable departure from past episodes of disruption," when Latin America proved "quite vulnerable" to "reductions in growth outside the region and especially worsening of conditions in advanced country financial markets."

De Rato, speaking to the Ibero-American Association of Chambers of Commerce in Madrid, warned that if the current global financial turbulence "turns out to be prolonged, the impact on the global economy," including Latin America, "could be more substantial." But he pointed to a number of developments that suggest why "things will be different this time around." They include:

Less reliance on the United States. In 2000, 57 percent of Latin America's exports went to the United States, while in 2006 the share had declined to 47 percent. The United States is likely to be the country most affected by the turbulence, which has its roots in the U.S. mortgage market. The United States is still a dominant export market, but emerging market countries are becoming "more important sources of global demand."

High commodity prices are likely to be sustained. Many Latin American countries "have benefited from very large gains in their terms of trade in the last five years, especially from rising commodity prices." If those prices should fall, it would be a source of concern, but they have not and they have been sustained in part by demand from emerging market countries.

Reduced vulnerability to conditions in advanced financial markets. So far Latin America has been relatively unaffected by the turmoil that has hit the United States and Europe. De Rato cited reduced reliance on short-term debt, reduced currency mismatches, stronger external and fiscal positions and generally low public sector financing requirements.

More financial flexibility. Increasing numbers of countries are using flexible exchange rate regimes, which gives them more options (they don't have to defend a fixed currency). Moreover because most Latin American countries have run sound fiscal policies, they have more flexibility—debt payments won't force governments to cut spending at the same time growth is slowing. But few are strong enough to pursue countercyclical spending programs.

Sound remittance income from their citizens working abroad. There have been suggestions that declines in construction and housing in the United States, where many migrants live, could result in declines in remittances, an important source of income for many countries. "But we have not seen this effect in the past" and a new study by the IMF suggests little relationship between U.S. economic conditions and remittances.

Should global turbulence persist and worsen, the outlook for Latin America would deteriorate, de Rato warned. Worse than anticipated global growth would affect exports and commodity prices and if the credit crisis were to hit a major emerging market country, there could be a "reassessment of risks for all emerging markets."

Although the economic fundamental in Latin America "are stronger on average than in the past," he said "there are also variations between countries, some of which have already been noticed by the markets."

Focus on inflation

He emphasized that countries need to follow sound economic policies. Improvements in tax policy and administration and higher commodity prices have led to improved budget positions, he said, but noted that recently there have been "significant increases in current expenditures" in many countries that could lead to problems if commodity prices fall or tax collections falter. He observed that many countries have been following sound monetary policies and they need to continue to focus on inflation.

The IMF chief also outlined several impediments to Latin American growth, including underdeveloped financial markets and declining investment. He said that government capital spending as a portion of total government spending is falling, and private investment has been insufficient to offset the decline.

De Rato, who steps down as IMF head the end of the month, also returned to a theme he has emphasized before: that Latin American governments must "make strong efforts to reduce poverty and inequality," especially by gearing growth policies toward poverty reduction. Although there has been progress since the turn of the century, he said, in 2006, 38 percent of Latin American citizens still lived in poverty.


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