Latin American policymakers have to rebuild fiscal buffers in order to avoid being caught off guard by a slowdown in China, to which they are more exposed now than ever, World Bank and IMF officials told Emerging Markets.
The magnitude of the shock will largely depend on the nature of the transition in China, whether it is cyclical or structural, the officials said. “There has been a change in the constellation of global risks that affect Latin America the most in the last eight months. China has now become a more important source of concern than Europe,” said Augusto de la Torre, Latin America chief economist at the World Bank, in an interview with Emerging Markets.
China’s growth slowdown is “not just a cyclical phenomenon,” said de la Torre, and it will lead to a more permanent slowdown. “China is undergoing the beginning of a more structural transformation where, slowly but surely, the sources of Chinese growth will rotate in favour of domestic sources, and will rely less on an export-led growth model. This transformation is not painless, and it will imply a more permanent slowdown,” he said.
“The big question mark will be whether the transition will be a smooth one or whether it may be affected by some rocky turbulence. If there is turbulence along the way, the consequences for the region will be more difficult,” de la Torre said. “China has become extremely important for Latin America.”
This means that there will be additional pressures on Latin American policymakers to push their reform agendas forward, especially on the fiscal and social fronts, he said.
Meanwhile, Latin American central banks have warned that countries may well be caught off guard should a new, full-blown large scale crisis erupt. “Resources available have been decreasing and would likely be insufficient if a new shock arises,” Julio Velarde, governor of the central bank of Peru, told Emerging Markets. “The current IMF loan conditions would only be enough to cover the financial needs for Bolivia, Peru and Venezuela.”
Other regional mechanisms such as Chiang Mai Initiative in Asia, or the capital increases in various regional banks, may not be enough to feel the gap. Financial integration with the world economy also implies greater risks when the global economic conditions deteriorate, due to the quick reversal of capital flows. But José Dario Uribe, governor of the central bank of Colombia, said buffers have been strengthened. “Many Latin American countries have been accumulating foreign reserves in important amounts. Colombia is also a user of the IMF’s flexible credit line. It is an additional protection that we have,” he told Emerging Markets. “To be integrated with Asia is a plus,” he said.
The Fund’s director for Asia and the Pacific department, Anoop Singh, said the trade between Asia and Latin America would increase again after a transition period. “It is part of a historical process. It will increase further. There is no doubt,” he told Emerging Markets. “The rebalancing is taking place,” he said.