vate and public sectors.
In particular, in order to directly address the
potential refinancing needs of the region’s private
companies, LASFRC recommended that, when feasible, EMF resources be channeled directly to the private sector using the already established expertise of
organizations such as the International Finance Corporation, the Inter-American Investment Corporation
and the Corporación Andina de Fomento.
7 This could
be the case when recipient companies have an established track record of accessing the international capital market and hence have complied with regulations
applying to debt issues in developed capital markets.
Resources to the public sector would be channeled
through the International Monetary Fund, the Inter-American Development Bank and the World Bank.
The policy actions taken by advanced economies so
far have somewhat improved the financial picture for
Latin America since the end of 2008. In particular, the
actions of central banks appear to be slowly unfreezing
the capital market, as exemplified by some reduction
in risk spreads for most Latin American economies relative to the October 2008 peaks. Although the capital
market continues to be closed for most of the region’s
corporations, the governments of Brazil, Colombia and
Mexico have been able to issue new debt.
Yet recessionary forces in the world economy are
deepening. As mentioned earlier, trade volumes and
values are shrinking prospects for current accounts
and output all around Latin America. In this context, a
significant worsening in economic prospects and deteriorating fiscal accounts is likely. The ultimate effect on
current accounts will depend on the relative strength
in the decline in external and domestic demand.
Unlike the financial crises of the 1990s, this time
there is hope that the region will be able to put up
a good fight. Policy frameworks around the region
provide more room for maneuver for both fiscal and
monetary policy. In particular, there is less dollariza-tion, more exchange rate flexibility and more fiscal
flexibility. Most central banks have accumulated significant stocks of international reserves. This time,
Latin American economies can rely less on foreign
help than on their own financial strategies.
There is no doubt that Latin America is still fragile and vulnerable to unexpected events. At the same
The ability of Latin
American countries to
adopt responsible, non-budget-busting stimulus packages may well
determine how they
weather current economic turmoil. Fortunately, six years of high
commodities prices in
the region have provided a strong cushion for
many. At the same time,
record levels of fiscal revenues and corresponding
low levels of debt have
buttressed regional fiscal reserves, and many
countries have adopted conservative spending policies that serve
as models of responsi-
ble fiscal management.
These policies will
be key in determining
how effectively and safely countries can engage
in the sort of responsible fiscal stimulus that
may be necessary.
Chile is a prime example. An open and relatively small economy, Chile is
relatively more exposed
to the global recession
compared to many larger
economies. The price of
copper, its main export,
has sharply declined
since mid-2008, and compared to other countries,
growth has been low and
inflation has held steady.
Yet conservative spending policies aimed at
building reserves have
enabled Chile to take
concrete fiscal measures
to stimulate the economy
and withstand the crisis.
In January, President Michelle Bachelet
announced the larg-
time, while it is naive to believe that the region can
fully decouple from the world economy, Latin America is unlikely to collapse. This is why it is critical that
the international community follow the recommendations laid out by LASFRC. By avoiding protectionism and creating bold new instruments to enhance
multilateral action, it can contribute significantly
to a more balanced adjustment in the region. In this
respect, forthcoming meetings of the G- 20 are the
appropriate fora to coordinate and mobilize such multilateral initiatives.
At the same time, policymakers around the region
should prepare for the effects of a significant slow-