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A man uses a mobile phone while walking through an underground mall in a banking district in Brazil. (Bloomberg) |
Latin America’s vulnerability to external shocks is greater today than before the 2008 financial crisis because governments have increased spending and companies have taken on more foreign debt to fuel growth, the Inter-American Development Bank said.
“History teaches that exits from extremely low U.S. interest rates may be smooth or bumpy,” the IDB said in a report released Sunday at its annual meeting in Costa do Sauipe, Brazil. “Changes to the expected path of short-term U.S. interest rates could affect capital inflows that have strong and persistent effects on growth in some countries.”
Assuming the U.S. tapering is implemented without surprises, economic growth in Latin America will be 3 percent in 2014 and 3.3 percent in 2015, the IDB said. That is close to the fastest pace the region can grow without stoking inflation, the bank said.
The outlook could be jeopardized by an accelerated unwinding of monetary stimulus in the U.S. and a protracted slowdown in China, according to the report. Efforts to boost growth through increased spending have led to a further deterioration of public finances in 2013, the bank said.
“There is less space now to respond if there is a negative shock,” IDB economist Andrew Powell, who coordinated the study, said in an interview by phone from Washington.
Countries in the region on average saw their budget balance deteriorate by 3 percentage points of gross domestic product from before the 2008 crisis. This helped drive debt ratios to 42 percent of gross domestic product from 36 percent of GDP in 2008.
Brazil’s credit rating was cut by Standard & Poor’s on March 24 to “BBB-,” the agency’s lowest investment-grade rating, from “BBB.” Sluggish economic growth and an expansionary fiscal policy are fueling an increase in the country’s debt levels, S&P said.
Only three of 21 countries improved their primary budget balances in 2013: Uruguay, Honduras and Nicaragua, the IDB said.
After expanding at twice the speed of the 1980s for the last decade, economies in Latin America last year expanded 2.4 percent, according to data compiled by Bloomberg. That was the slowest pace since 2009, as policy makers struggled to find new engines of growth amid waning commodity prices and stuttering global demand.
Countries relying on metals are more vulnerable to a Chinese slowdown than food exporters, Jose Juan Ruiz, IDB chief economist, said Sunday. (Bloomberg)
