Americas Quarterly - Spring 2009

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

Priming
the
economic
PumPs

by Davor Luksic-Lederer

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.