Latin American policymakers gathered in Montevideo were yesterday urged by leading experts to start drawing up strategies to cope with the threat of another global economic crisis.
Fears were growing at the Inter-American Development Bank meetings that the region was at risk of fresh downturn in the eurozone turmoil or a slowdown in Chinese economic growth that could trigger a sudden flight of capital.
Calls were building for Latin American economies to deploy counter-cyclical economic policies amid rising fears the region lacks the fiscal space to cushion the impact of another global crisis.
The vulnerability of South American exporters to capital flight is high given the links between high commodity prices, capital flows and domestic credit growth, they said.
Ernesto Talvi, executive director of the Montevideo-based Centre for the Study of Economic and Social affairs, told Emerging Markets. “Those countries that have been more economically dynamic post the collapse of Lehman are more vulnerable to capital flight, particularly, those in South America rather than Mexico or Central America. That’s because capital flows have been accompanied by current account deficits,” he said.
A major worry is that the international community does not have the resources to stem any freefall in global markets if another financial shock takes root since “resources of the IMF and developed central banks have been exhausted by the eurozone crisis,” he said.
Liliana Rojas-Suarez, a senior fellow at the Center for Global development in Washington, said most economies in the region had allowed their public finances to weaken as their economies boomed.
“For the large majority of countries in Latin America, there has been a deterioration in the fiscal position since the crisis,” she said “Brazil remains in a dangerous position.”
Writing in today’s Emerging Markets Carmen Reinhart, a senior fellow at the Peterson Institute for International Economics, said she feared politicians might take for granted that capital inflows and a booming terms-of-trade position are “permanent features of the brave new world”, adding: “ Historically-speaking, when that happens, dangerously pro-cyclical policies kick in.”
Henrique Meirelles, former president of the Brazilian Central Bank, cited the Chinese slowdown and the European crisis as the main risks.
Barry Eichengreen, Professor at the University of California Berkeley, also warned against the possibility of a sudden reversal of capital flows that would cast a shadow on the performance of the Latin American economies.
He told Emerging Markets the outlook was so uncertain that it was difficult to say whether it was facing a status quo, slower growth and more capital inflows, or even the prospects of an interest rate hike in the US that may lead to a reversal of capital flows. “It is especially hard to formulate policies in this environment,” he said.
Other experts said the focus should be on building long-term sustainable growth. Latin America must beef up productivity in the industrial sector, reform tax codes and strengthen social safety nets, Andrew Powell, principal advisor at the IDB, told Emerging Markets.
Meanwhile Alberto Pfeifer, executive director of the Business Council of Latin America said countries must reduce public spending waste, specialize in value-added goods, deepen domestic capital markets, streamline regulation and invest in research and development, among other measures.