Wednesday, October 13, 2010

Is This the Latin American Decade?

From the Financial Times:

The World Bank has become the latest to join the chorus of policy-makers praising Latin America’s recovery from the global financial crisis, but warned further reforms are needed to ensure that recent successes were extended into durable growth.

In an ebullient report entitled “The New Face of Latin America”, the World Bank said past crises had immunised the region, so that during this financial crisis while advanced economies caught pneumonia, Latin America “only got a cold”.

By next year, Latin America will have regained all ground lost during the crisis, the World Bank said, with Brazil’s economy leading the way. This better-than-expected result, with forecast regional growth of 6 per cent this year and 4 per cent in 2011, was due to a decade of improved monetary policy, better fiscal management, and the hemisphere’s growing trade links with Asia.

Furthermore, Latin America had made greater use of equity finance and direct investment rather than debt to bridge local saving gaps. This had left the region a net creditor to the rest of the world. As a result, free-floating currencies could devalue during the global crisis without increasing the local cost of servicing hard currency debt – a hard won lesson from the region’s debt crises of the past.

The World Bank Recently Reported:

Latin America’s new face following the global financial crisis is tough and almost impervious to shocks but also soft and kind to the most vulnerable.

A World Bank report argues that the region’s economic demeanor is resilient, globalized, and dynamic as it zips towards 5-6 percent growth for 2010 and shows that its investments in social protection managed to shield the most vulnerable from the worst effects of the downturn.

Presented as part of the World Bank Annual Meetings, Latin America’s semiannual economic report also reveals that the region’s recovery is ahead of the rich nation’s and compares well with the Asian Tigers’ expected growth of over 7 percent. All in all, the crisis in Latin America & Caribbean (LAC) was short lived, as compared to other parts of the globe, thanks in part to solid macroeconomic and fiscal frameworks set in place well before the crisis struck.


Here are the primary reasons for the resurgence:

1) Improved macroeconomic and financial policy frameworks that have become shock absorbers or cushions rather than conduits to amplify crises. These improvements include strong currencies –which in the past were shock transmitters - and countercyclical fiscal policies that have allowed for potent fiscal stimulus during the crisis. Banking systems have also been strengthened and currently there are enough buffers in place –such as liquidity and capital provisions- to endure a shock without infecting the rest of the economy.

“That’s a very importance factor that explains LAC’s resilience and why it’s recovering very nicely in this phase,” said de la Torre.

2) Integrating better into global financial markets has allowed the region to become a net creditor to the world rather than a debtor -a move that provided a cash cushion against downturns. In the past, Latin America used to hold an excess of debt contracts that exposed it to rollover risks, interest rates hikes, and sentiment changes, that could wreak havoc in its finances. These days the region is a large debtor on the equity side, including Foreign Direct Investments (FDI), and a creditor on the debt side, which forms a more robust debt mix. FDI surpassed the $60 billion mark in 2010 almost reaching 2007 levels.

3) Diversification of its trade structures has placed Latin America in a unique position to profit from China’s voracious appetite for the region’s commodities while desensitizing it from economic activities in rich areas such as Europe, the United States and Japan. Much of the region’s growth can be credited to the ‘China Connection’, which saw the country’s share of commodity exports grow tenfold since 1990 (from 0.8 percent in 1990 to 10 percent of total commodity exports in 2008).

The World Bank article has a link to a very interest PDF on the region: highly recommended.