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Emerging Markets

LatAm faces funding shortfall

Latin America will face a big financing shortfall this year, despite recent initiatives to funnel liquidity to regions in need and a turn in capital markets sentiment, experts have warned.

Latin America will face a big financing shortfall this year, despite recent initiatives to funnel liquidity to regions in need and a turn in capital markets sentiment, experts have warned.

Global markets surged this week, after the US announced a new plan to clean up its banking sector. UK prime minister Gordon Brown on Thursday proposed a $100 billion trade finance fund, and IMF chief Dominique Strass-Kahn announced a large expansion to the Fund’s lending facilities to address financing gaps in developing economies.

But fears are growing in Latin America that the new policy initiatives – including a proposed doubling of IMF resources – will fall far short of the mark, given the pressure from capital outflows and dollar illiquidity.

Former IDB chief economist Guillermo Calvo said: “These initiatives are still insufficient to meet the public and private sector funding needs of the region.”

He warned that policy-markets and analysts have not awoken to the historic depth and duration of the global downturn, fuelling complacency about the regional economic stability this year.

Liliana Rojas-Suarez, chair of the Latin America Shadow Regulatory Committee (Claaf), argued that “unprecedented resources” must be made available – through new facilities and greater resources for existing institutions – to channel funds to the region.

Calvo, Rojas-Suarez and a host of prominent Claaf-affiliated economists estimate that the region needs some $250 billion to roll over public and private sector debt this year alone. “Our estimate is modest, and assumes only 20-30% of outstanding debt is problematic,” Rojas-Suarez said.

That sum would rival the proposed doubling of the IMF’s resources to $500 billion, likely to be agreed at next week’s G20 meeting in London.

The CLAAF has proposed setting up a special “emerging markets fund” to buy up public and private securities in emerging markets, including Latin America, Rojas-Suarez told Emerging Markets. This fund would open up to contributions from governments and sovereign wealth funds, and aimed to be “between $250 and $500 billion”.

The incentive for participation in the fund would be to make a healthy return on investment, but Rojas-Suarez noted that appropriate risk-sharing mechanisms would need to be implemented to make the proposition sellable.

Brazil’s finance minister, Guido Mantega, echoed calls for a radical increase in capital available to emerging markets. “I see a need for additional resources between $500 billion and $1 trillion. Beyond this, we need to create a special credit line to finance trade in emerging markets.”

Calvo fears the systemic breakdown in the global credit markets will force a long-lasting reduction in capital flows as markets, households and firms deleverage in the developed world for several years to come.

He argued that radical strategies are needed to address the precipitous drop of financing. He says that development banks needed to take on massive leverage and G7 borrowers benefiting from the flight to quality should repatriate capital into developed economies.

In the fourth quarter of last year, Latin America swiftly fell into the global market abyss. Exports, industrial production and domestic demand in the region plunged, as the developed world sank deeper into recession. The commodity cycle has turned against exporters: oil prices remained perilously low at $50 per barrel this week.

Morgan Stanley estimates that Brazil contracted by 13.6% in that quarter and Mexico 10.3%. “Many observers have yet to fully incorporate the severity of the decline we already saw at the end of 2008 and into early 2009,” argued Gray Newman, chief Latin American economist at Morgan Stanley.

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