Impacts of the Global Financial Crisis in Latin Countries
Brazil was hit extremely hard in 2008 but the response against the crisis came with a significant lag. We expect the growth in Brazil to achieve -1.2% in 2009. Mexico has also been hit pretty hard both because of its geographical and economic dependency of the US and the reliance on remmitances to foster growth. In turn, Mexico’s output is likely to decrease by -1.3% in 2009. Argentina is a case in point. The country faces inflationary pressures, problems with the farmers, lack of fiscal discipline, lost an opportunity to negotiate with the holdouts and with the international organizations. Even prior to this crisis we had observed a capital outflow from Argentina due to fear of another threat of default. On the top of all that Argentina relies, almost exclusively, on grain exports as a source of economic growth. In rainy days, like those we are living today, the main engine of growth does not work and we expect the country to post negative growth of -1% in 2009. Chile is another country that has been experiencing deflation and significant slowdown in consumption and in industrial production. Chile is a copper export country and with the slowdown in commodity prices the country has been negatively affected. Chile, however, is in a better position to fight the global financial crisis than other countries. This is so because Chile has a structural fiscal surplus which enables the country to indeed implement counter cyclical fiscal policies. In December the government announced a fiscal package of almost 2% of the country’s GDP. Still, all indicators point out towards negative growth rates (-1%) in 2009.
The room for counter-cyclical policy stimulus will be limited. Indeed, for the majority of countries in the region, years of building central bank credibility through disinflation, combined with debt reduction and liability management should provide some room for using policy in a counter-cyclical manner. This constitutes a break from the past, as during the 1990s, most Latin American countries would have been forced to raise taxes, cut spending, and hike interest rates ahead of a slowdown in economic activity or a deterioration of global economic conditions.
On the top of all that we have a global scenario where lower commodity prices combined with weaker activity should reduce inflationary pressures, allowing central banks to ease the monetary policy stance in 2009. While all the main Central Banks in the region have already implemented several rate cuts the point is similar to the US situation: monetary policy per se is not enough to prevent the impacts of this crisis. So the question that remains to be answered is the following: Should Central Banks in Latin countries give up fiscal responsibility in the name of growth?