Fiscal discipline is the best defence against the challenges in Latin American posed by the unfolding global economic crisis, a senior IMF official said yesterday.
Nicolas Eyzaguirre, the Fund’s Western Hemisphere director, said the region as a whole is in good shape, but called on policymakers to “avoid policies that will exacerbate vulnerabilities”.
“Our recommendation is not to reverse the path of fiscal efforts. The [global] situation is not as bad as to pursue expansionary policy,” he said.
“In the past, when there was a cold in the advanced economies we caught pneumonia. This time the pneumonia is in advanced countries and we will probably catch a cold [in Latin America].
“You can take good care of the cold and protect your health, or you can try to deny that you have a cold, and then you may eventually catch pneumonia,” he said.
Felipe Larrain, Chile’s finance minister, told Emerging Markets that his country was well prepared to deal with any external shocks.
“We have a sound fiscal surplus, and we can use our $20 billion sovereign wealth fund if needed to mitigate the effect of the crisis,” he said. He recalled that Chile had recently issued a bond at the lowest rate “of all Latin American countries in history”.
Chile continues to be the star performer the region, in spite of a recent wave of strikes and violent anti-government protests.
Larrain denied that the Chilean economic model is in question, following a strong wave of protest and the falling popularity of president Sebastian Pinera and his government. Larrain attributed recent social unrest to discontent linked to “the middle income trap” and a lack of patience from the population.
Mexico is especially exposed because of its proximity to the US market, although IMF officials have insisted that the country has achieved progress in terms of competitiveness that allowed to gain market shares in the US market.
Gilbert Terrier, an IMF official from the Western hemisphere department, said: “It is fair to say that the performance of Mexico in the industrial sector in the last few years post Lehman has been very strong.
“Industrial production is now at a higher level than it was before [the Lehman Brothers bankruptcy of 2008].”
The IMF expects Mexico to post 3.2% growth next year against 1.8% in the US, he said. “Mexico still have a lot of tools at its disposals to react,” in case of a sharper slowdown in the US.
John Welch, emerging market strategist at Macquarie Capital, said: “Latin American governments have generally done a good on the fiscal side.
“Brazil is a little bit behind. But apart from Venezuela and Argentina, the fiscal situation is not that bad. Chile and Peru have a surplus, Colombia is clearly making some strides and Mexico is working towards getting a small deficit.”